Market Report: Hopes for profits send Wolseley higher

The construction materials group Wolseley saw its shares trade higher as the bulls, lured by hopes of a turning point in earnings, outflanked the bears last night.

The stock firmed up after Morgan Stanley raised its forecasts for the group for the first time since 2006, noting the evidence of better than expected cost savings in last week's unscheduled trading update.

"Earnings momentum had taken a steep downward trajectory since October 2006.... However, Wolseley is now showing signs of self help with profits beating expectations despite the continued difficulties in [its] end markets," the broker said, reiterating its "overweight" view and upping its target price to 1680p from 1650p.

Analysts at Royal Bank of Scotland, though similarly pleased with the company's cost efficiency drive, struck an altogether bearish note on the stock. Repeating its "sell" recommendation, RBS said that while the interim results later this month "may provide relative support to the group's share price", it considered "Wolseley more than fully valued given [the] risks in the speed and scale of recovery in the group's key US, UK and French markets, as well as the risks attached to the degree to which the business can recover without cost growth and inflation at least in line" with its forecasts. In the end, Morgan Stanley's view prevailed, with Wolseley closing 40p ahead at 1590p last night.

Overall, the FTSE 100, up 51.42 points at 5405.94, inched past the 5400-point mark, while the FTSE 250 gained 135.44 points to 9479.83. The benchmark was powered by the commodity issues, with miners rising as metals prices firmed on the back of worries that the Chilean earthquake may affect supply. Kazakhmys led the way, advancing by more than 5.2 per cent, or 69p, to 1410p, while Fresnillo rallied by 4.3 per cent, or 32p, to 782.5p and Rio Tinto, which said its divestment programme had passed the $10bn mark with the completion of the sale of its Alcan Packaging Food Americas division to the Bemis Company, added 104.5p to 3468.5p.

The strength in the heavily weighted mining issues offset the weakness in parts of the insurance and banking sectors. Prudential was 12 per cent, or 72.5p, behind at 530p after announcing plans for a mammoth cash call to fund its purchase of AIG's Asian life insurance arm for $35.5bn. In the wider sector, Aviva fell by almost 4 per cent, or 15.1p, to 375.2p as news of the AIG deal weighed against recent rumours that the Pru might join hands with Resolution to mount a bid for the group.

In the banking space, HSBC was 5.2 per cent, or 37.6p, lower at 682p after its annual results failed to impress. Standard Chartered, which is due to update the market later this week, also failed to make any headway, easing by 36.5p to 1525.5p.

On the upside, Tesco rose to 433.05p, up 13.35p, after JP Morgan abandoned its negative stance, citing the improvement in the supermarket giant's sales performance in the UK and internationally, and the prospects for free cash flow generation. Moving the stock to "neutral" from "underweight", the broker also acknowledged the broader economic picture, saying: "We have been turning more positive on the UK food retail market in recent months as the country has avoided the deflationary pressures affecting other markets that we feared last year."

British American Tobacco was also strong, adding 59p to 2288.5p, after Citigroup, pleased with the earnings growth in last week's results, raised its target for the stock to 2460p. "Once again, a tobacco company has shown that it can get pricing [power] at a time when few other staples companies are able to do so," Citi said, repeating its "buy" recommendation. "BAT management said there is no sign that the excellent pricing environment is weakening in any way."

Elsewhere, the IT group Logica was flat at 119.4p after KBC Peel Hunt said that 2010 "will not be a year of recovery in the pan European IT market". "The pan-European IT services market is suffering from structural overcapacity," the broker said, reiterating its "sell" recommendation on the stock. "This is driving the volume and pricing declines that characterised the market in 2009 and will likely characterise it going forward. Logica's consulting division is most exposed to these trends."

Further afield, Salamander Energy was 4.3p firmer at 254.4p after Morgan Stanley adopted an "equal weight" stance on the oil and gas explorer and producer. While acknowledging that Salamander was entering an exploration-focused phase that could offer a healthy upside to investors this year, the broker said it preferred the FTSE 100-listed Tullow Oil, which was 10p higher at 1199p, Soco International, which gained 36p to 1570p, and Afren, 1p weaker at 80.75p.

"Afren remains a top pick," Morgan Stanley added. "The recent concerns on liquidity and Nigeria are overdone in our opinion and, if anything, our conviction on our 'overweight' rating has increased as management delivers on the acquisition strategy and provides greater evidence of Afren's technical expertise in appraisal and development."