Market Report: Hopes for rail division drive Invensys higher

On many occasions over the past two years, brokers have tried to call the turn at Invensys and, on each occasion, they have been proved wrong. Yesterday, Citigroup became the latest to do so as it upgraded its recommendation on the struggling engineer to "buy" from "hold", helping the stock gain 0.5p to 15.75p.

The US broker was particularly bullish about Invensys' rail systems division. Citigroup said: "The increase in orders at the rail systems unit and the prospect of solid demand going forward from both Network Rail in the UK and in the US as a result of the Transportation Act greatly increases our confidence that the business can return to profits growth in 2006 and beyond."

The broker, which set a 18p near-term price target on the shares, suggested that the green shoots of recovery are also appearing at Invensys' controls division. It highlighted last week's results from the group which showed that order intake at the unit fell just 1 per cent during the previous quarter.

Despite Citigroup's upbeat stance, Invensys remains a risky proposition. In March 2003, the stock hit an all-time low of 10p and although it has rallied strongly on several occasions since, each has proved to be a false dawn prompting a quick retreat by the shares towards 10p.

Although the group's markets have improved steadily, two themes have haunted the company throughout this period, namely its debt mountain, estimated at about £700m, and a £600m pension-fund deficit. These remain a problem for the engineer.

In the FTSE 100, Smith & Nephew, up 9.5p to 500p, featured as one of the best blue-chip performers after Deutsche Bank argued that shares in the medical devices group look 15 to 20 per cent undervalued. The broker said it was confident S&N can meet its growth targets and set a 600p price target on the stock.

PartyGaming rose 2.25p to 95.75p thanks to HSBC Securities, which was heard to have started coverage of the online poker operator with a "buy" rating and a 122p price target. According to HSBC, PartyGaming remains very much a growth company in what is still a fast-growing sector.

Elsewhere, dealers reported heavy demand for BG Group, up 2.5p to 537p, reigniting rumours of a possible bid for the oil and gas explorer. In the same sector, Premier Oil added 18p to 745p after boasting of an oil discovery at its site offshore Mauritania.

The FTSE 100 dropped 30.4 points to 5,439.6, despite gains on Wall Street. To blame was Vodafone's profits warning, which not only knocked £9bn off the company's market value but also weighed heavily on sentiment towards the wider telecoms sector. Vodafone closed 15.75p lower at 129.25p on volume of £1.4bn, a record number. Cable & Wireless retreated 3.75p to 119.5p, and BT Group dropped 3.5p to 203.5p.

In the retail arena, House of Fraser ticked 1p higher to 106p in heavy trading amid rumours of a private-equity bid for the departments store group. HoF shares have performed well over the past four days, with some suggesting that the privately owned Debenhams might be tempted to make a move on the retailer.

Analysts, however, were sceptical of an offer emerging for the group before the key Christmas trading period. Woolworths gave up 0.25p to 35.5p as Nick Bubb, at Evolution Securities, played down talk of a bid for the retailer.

Pilkington ticked up 3.75p to 153.25p on hopes Nippon Sheet Glass will increase its offer for the UK group to 162p a share from its previous 150p. According to wire reports, senior executives from the Japanese company, which holds a 20 per cent stake in Pilkington, will soon be in London to discuss the proposal.

At the smaller cap end of the market, Cambrian Mining, off 2.5p at 127p, was said to be putting the finishing touches to a deal which will see it transfer its coal assets to the AIM-listed Coal International. Shares in the energy group have been suspended since the middle of September pending completion of the deal. Gossips reckon this process should be finished before the end of this week.

Elan Corp rose €0.82 to €8.97 as dealers reported a rush by bears of the stock to close their positions. Elan has been an easy target for short sellers after it suspended its all-important Tysabri drug for multiple sclerosis on safety grounds. But an upgrade of Elan by the US broker AG Edwards has led to hopes that Tysabri could soon find itself back on the market. Should this prove to be true, Elan shares are likely to soar as all those short of the stock rush to close their positions. This phenomenon, known in the market as a "bear squeeze", can quickly cause investors spiralling losses.

Finally, Telspec ticked 0.75p higher to 18.5p after the telecoms equipment maker put itself up for sale.