Market Report: Compass cash flow concerns stoke City fears

According to the latest research from Credit Suisse First Boston, Compass Group shares are clearly overvalued and, as the Swiss broker went about the Square Mile setting out its case, investors certainly took note.

According to the latest research from Credit Suisse First Boston, Compass Group shares are clearly overvalued and, as the Swiss broker went about the Square Mile setting out its case, investors certainly took note. The catering giant closed among the worst performers in the blue-chip index, shedding 6.5p to 313.75p, as Credit Suisse urged market players to exit the beleaguered company.

These days the amount of cash Compass can generate in a year is the key measure by which the group's performance is judged and the Swiss broker argues that in this respect the group's prospects are "mediocre". It calculates that over the next three years, Compass will grow its free cash flow by just 4 per cent. As a result, Credit Suisse is convinced that shares in the group will underperform going forward and it set a price target of 210p.

As a result of September's massive profits warning, the stock hit an all-time low of 213p. At the time, Compass admitted it had overestimated its ability to generate cash after it was forced to inject an extra £100m of working capital into growing its defence, offshore and remote site businesses. The management also confessed to having misjudged various schools contracts.

Alliance & Leicester was also in retreat, giving up 13p to 906.5p, as Martin Cross, an analyst at Teather & Greenwood, pointed out that shares in the mortgage bank stand at near three-year highs at a time when earnings in the industry are starting to slow. Mr Cross fears the group is too exposed to the weakening mortgage market and downgraded his earnings forecasts accordingly. Telling investors to sell the stock, he assured them that a bid for A&L is unlikely.

The FTSE 100 finished closed 22.8 points weaker at 4,823.9. This, however, was well above the index's low for the day of 4,800.8 thanks to a strong rally in the afternoon, prompted by a solid start to trading on Wall Street. Across the Atlantic the Dow Jones Industrial Average and the tech-dominated Nasdaq were lifted by early deals.

In the pharmaceuticals sector, Cambridge Antibody rose 10p to 725p after Abbott Laboratories boasted of forecast-beating sales of its Humira product. Humira reported sales of $852m (£455) in the fourth quarter, compared with expectations of $821m. This is great news for CAT. It receives a royalty payment from Abbott as the US group used CAT technology to develop the rheumatoid arthritis drug. The greater sales Humira generates the larger the royalty CAT gets.

Elsewhere in the sector, Oxford Biomedica added 2p to 19.25p on whispers of a bid for the drug developer. The company has a number of drugs in late-stage trials and so is likely to be on the radar screens of big pharma players.

Luminar dropped 34p to 563p amid heavy shorting of the stock shortly beforea Christmas trading statement of the nightclubs operator this week. Bears took the view that the update by Luminar will disappoint. Given the stock's strong rise in the run-up to the statement, it is likely to be hit hard if the company fails to deliver.

But analysts following Luminar are convinced that investors can expect good news from the company. Last week Numis Securities was heard urging its clients to add to their shareholding. It said: "We anticipate a solid trading statement which should act as a catalyst for the shares." For the current year, Numis expects Luminar to achieve a pre-tax profit of £58m.

Mersey Docks jumped 10p to 947p as traders remained convinced that a counter bid is on the way for the company. At present, 925p a share is being offered by a private equity firm for the ports operator. Analysts believe that if there is to be a higher offer it is likely to come from Peel Holdings.

The private company is Mersey Docks' second-biggest shareholder, with an 11.7 per cent stake, and already has an interest in the sector through the ownership of the Manchester Canal Company and Clydeport. However, Investec Securities urges traders not to get too carried away. It takes the view that any counter offer is not likely to be significantly above the company's present value.

At the small-cap end of the market, Dyson rose 3.5p to 362.5p on talk of strong trading at the materials group. If you believe yesterday's gossip, brokers will soon have raise their profits forecasts for the company. Similarly, Carrs Milling jumped 12p to 538.5p on rumours that business is booming at the animal feed specialist.

Finally, a buzz surrounded Caledon Resources, up 0.25p to 5.87p. Word has it a bullish drilling report from one of the group's Chinese projects is on the way. The company has previously found success producing gold ore in the Guangxi Province of Southern China.