Market Report: AstraZeneca gains as traders scent value

AstraZeneca firmed up last night as traders bought in on the view that the market may be underestimating the upside potential in the pharmaceutical group's shares.

The stock rose to 3083p, up 29.5p, after Morgan Stanley said that the current price failed to reflect the earnings, dividend yield and free cashflow that AstraZeneca can generate over the next seven years, while the same time it overestimated the risks. Not only could a partial reallocation of research and development (R&D) funds provide a catalyst for shareholder value, but over in the US, Astra's marketing strength coupled with regulatory approval of a broader label could drive sales of Crestor, the company's cholesterol-reducing drug.

"Recent senior R&D management changes and more negative pipeline news could precipitate a move to partly withdraw from internal research and transition to a search and discovery model," the broker said, estimating that a reallocation of $1bn a year to external investment could increase Astra's net present value by up to 350p per share. "We anticipate at least one major R&D site closure over the next 12 months as the company reshapes its business model towards development outside select therapeutic areas," the broker added, revising its stance on shares to "overweight" from "equal-weight", with a revised 3600p target, compared to 2900p previously.

Overall, the FTSE 100 fell below the 5400-point marker, declining by 1.6 per cent or 85.7 points to 5335.1, while the FTSE 250 lost 54.22 points to 9418.07. The market faced a number of pressures. In the US, the Obama administration announced curbs on propriety trading, rattling investors on Wall Street and in the City, while concerns about Greek debt nearly drove the Euro to a six-month low against the US dollar.

Recent news of further monetary tightening in China also weighed on sentiment, as did late reports of an aeroplane bomb scare in the US. The various concerns offset the impact of the latest Chinese growth figures, which revealed that the country's economy grew by 10.7 per cent in the final quarter of 2009. At this rate, China is on track to overtake Japan and claim the mantle of the world's second-largest economy this year.

A number of miners remained under pressure as traders focused on signs of monetary tightening instead, with Kazakhmys retreating to 1280p, down 6 per cent or 82p, Anglo American falling to 2488p, down 163p, and Rio Tinto losing 171.5p to 3294.5p. Xstrata at 1099p, down 43p, and Vedanta Resources at 2535p, down 94p, were also held back last night, as was Lonmin, the platinum mining group which fell by 31p to 1849p despite some words of support from Canaccord Adams. "We believe the long-term investment case for platinum remains strong," the broker said, switching its stance on the stock to "buy" from "sell", with a revised 2300p, compared to 1050p previously.

Elsewhere, in the banking sector, worries about the Obama administration's regulatory moves were supplemented by renewed concern about the potential impact of the reforms proposed by the Basel committee of the Bank of International Settlements (BIS). This offset the impact of pleasing results from Goldman Sachs, and some supportive comment from Deutsche Bank. Royal Bank of Scotland was the weakest, declining by more than 7 per cent or 2.68p to 35.3p, while Barclays fell to 283p, down almost 6 per cent or 17.85p, Lloyds lost 3.2p to 53.3p and Standard Chartered declined by 78p to 1430p. HSBC at 675p, down 8.4p, was the most resilient after Deutsche moved it to "buy". "We regard HSBC as the most defensive stock in the UK banking universe," the broker said, adding that while the BIS proposals were "not helpful", HSBC was "well structured, and liquid".

Over in the utilities space, National Grid was in focus, closing broadly unchanged at 645p, down 1.5p, after HSBC reiterated its "overweight" stance. Though positive, the broker did point out that its analysis of the company's credit metrics suggested that by 2013 National Grid "will either need to issue equity or rebase its dividend in order to maintain its credit rating". In the wider sector, United Utilities swung to 525p, up 3.2 per cent or 25p, after saying it would cut its dividend for the next financial year by less than expected.

Further afield, Enterprise Inns drove sentiment around the pub operators, rallying by almost 20 per cent or 18.6p to 113.5p after cheering investors with a reassuring update. Investec remained cautious, though, saying that while news of a reduced rate of decline in profit per pub was likely to be well received, significant regulatory and trading risks persisted. Investors were content to wade in, however, with Punch Taverns climbing to 81.05p, up almost 9 per cent or 6.6p, and Greene King galloping to 427.4p, up 5.9p.

Also on the upside, ITV was 0.3p firmer at 58.15p, with the stock attracting attention after the Court of Appeal ruled that BSkyB will have to reduce its 17.9 per cent holding the broadcaster to below 7.5 per cent. The news had a limited effect on ITV's share price, however, with traders expecting Sky to appeal to the Supreme Court. At the close, Sky was 4p behind at 560p.