Market Report: Carnival draws fuel from bullish broker

Carnival outperformed the wider market last night after Evolution Securities took on the bears by recommending that, instead of fleeing on near-term fears about high oil prices, investors should focus on the cruise operator's long-term prospects.

The call was an ambitious one, not least because this week saw the Opec oil cartel endure what the Saudi Arabian oil minister called one of its "worst" meetings amid disagreement over whether or not to raise supply. Although some members are still likely go ahead and up supply, the oil price outlook remains uncertain at best.

So far, rising prices have proved hard to bear for Carnival, whose shares have been "hijacked by the price of crude oil", according to Evolution. Indeed, the bears have jumped aboard and pushed the cruise operator's stock down by nearly 20 per cent since the start of February.

But the broker suggested that, instead of fixating on oil, investors would be better off turning their attention to Carnival's free cash flow, which it expects to "surge as new ships enter service and trading recovers". If, in addition, the oil prices ease and boost the global economic recovery, then "we expect this sea of cash to turn into an ocean".

"We estimate free cash flow to rise from a low of $2.4bn in 2009 to $4.7bn in 2014, and new shipbuilding falling from 78 per cent of cash from operations to just 24 per cent in 2014," the broker explained, helping the stock to close at 2,299p, down 0.6 per cent or 14p, against the 1.6 per cent fall for the wider FTSE 100 index."Carnival has just eight new ships on order for delivery over the next four years."

Moreover, the broker added that its estimates were based on an implied oil price of $129 per barrel – well above current levels. "A 10 per cent change in the fuel price impacts earnings by around 23 cents per share, a 9 per cent change to [earnings estimates for 2011]," Evolution said, reiterating its "buy" view.

Overall, the market retreated, with the FTSE 100 closing at 5,765.8, down 90.54 points, and the FTSE 250 losing 1 per cent or 125.6 points to 11,786. The weakness, which saw only seven blue chips close in the black, was down to fresh concerns about global economic growth. In the UK, new figures showed that factory output had fallen at its sharpest monthly pace in close to two years in April, while over in China, data showed that the country's export growth slowed in May, putting question marks over the strength in demand from key Western economies.

The growth concerns quickly fed through the mining sector, which was lower on the day. Vedanta Resources was 67p behind at 1,977p, while Anglo American fell by 97.5p to 2,891p. Sector peer Rio Tinto was also caught in the sell-off, losing 95.5p to 4,104p.

The biggest loser, however, was the Eurasian Natural Resources Corporation, the Kazakh miner which fell by 60p to 742p following a report that a third independent director may quit its board. Mehmet Dalman was said to be considering whether or not to quit over corporate governance concerns.

Although there was no official confirmation of his plans, the report did stoke worries, as the group announced the departure of four non-executive directors earlier in the week. Two of the four – including corporate bigwig Sir Richard Sykes – failed to win re-election at the miner's annual meeting, which also saw the announcement of a corporate governance review.

Elsewhere, the retail sector was also pressured last night, hung over from the disappointment caused by Home Retail Group's update earlier in the week. Home Retail itself was 9p behind at 165.5p, while Kingfisher fell by 6.5p to 267.5p. Marks & Spencer was 9.1p lower at 358.7p, while the supermarket groups Tesco and Sainsbury, both of whom are set to post quarterly trading updates next week, were respectively 3.1p behind at 406.5p and 4.2p weaker at 323.4p. The former fell despite support from Jefferies, which upgraded Tesco to "buy" from "hold". Dixons Retail managed to overcome the weakness, however, managing to edge up by 0.03p to 17.61p.

Further afield, the recruitment group Hays was in focus as speculators revisited rumours of bid interest from Adecco, the Swiss staffing giant which in the past has tried to snap up Michael Page International, which was 1.5p lower at 525p.

Last night, Hays was among the few stocks that managed to rally, rising by 3.1p to 109.2p after Adecco declined to comment on the rumours – but said "bolt-on acquisitions are possible". Weighing in on the chatter, a Seymour Pierce analyst wondered if Hays might be too big a target. "Hays has got the accountancy business and quite a strong presence in construction, so in terms of what Adecco has said it would like to buy in the past, Hays does fit the bill. I just think that this might be slightly too big for it to absorb at the moment," he said.

The suggestion of deal activity in the recruitment sector also lifted SThree, which was 1.5p firmer at 398p.

FTSE 100 Risers

Capita 740p (up 5p, 0.7 per cent)

Outsourcing giant gains ground as traders seek stocks with defensive characteristics.

Arm 567.5p (up 1p, 0.2 per cent)

Semiconductor group rises after Redburn Partners weighs in with some bullish commentary.

Aggreko 1,935p (up 1p, 0.1 per cent)

Like Capita, temporary power specialist stands firm thanks to its defensive credentials.

FTSE 100 Fallers

AstraZeneca 3,108p (down 66.5p, 2.1 per cent)

Pharma group fails to bank on defensive credentials after Barclays Capital cuts to "underweight".

Lonmin 1,460p (down 84p, 5.4 per cent)

Miner cuts full-year guidance; UBS sets 1,500p target, starts coverage with "sell" view.

BG 1,347p (down 23.5p, 1.7 per cent)

Energy giant falls with the wider sector despite RBS revising its stance to "buy" from "hold".

FTSE 250 Risers

Bellway 716p (up 19p, 2.7 per cent)

Housebuilder enjoys strong rally after posting a confident interim management statement.

Ashmore 384.4p (up 7.1p, 1.9 per cent)

Fund manager boosted by Peel Hunt, which raises its target for the stock to 440p.

Bovis Homes 426.7p (up 6.9p, 1.6 per cent)

Housebuilder rises with the wider sector after Bellway's update lifts sentiment.

FTSE 250 Fallers

Halfords 384.5p (down 21.4p, 5.3 per cent)

Cheer prompted by recent full-year results is overshadowed by weakness across the retail sector.

Petropavlovsk 712.5p (down 24.5p, 3.3 per cent)

Retreats as gold prices endure volatile session, touching a one-week low in the afternoon.

Regus 107.7p (down 0.1p, 0.1 per cent)

Offices group ends broadly flat after reaffirming its bid proposal for MWB Business Exchange.