Market Report: Travis Perkins falls amid pricing worries

The builders' merchant Travis Perkins was under pressure last night, falling back amid concern that the market may be anticipating a swifter turnaround in profits than is likely in the current economic environment.

HSBC said that while the company was on the right path and positioning itself well for a recovery, the market might be getting ahead of itself, with current consensus thinking overlooking inventory levels, current PPI data for the items Travis sells and the company's weakening gross margin – all of which points to pricing pressure. Beyond the structural risk, the company may also face cyclical pressures as the economy recovers, with the mix shifting in favour of lower value products, resulting in average price declines.

"We believe a combination of mix change and pricing pressure in some lines is likely to dampen the value of sales and profit growth," the broker said. In keeping with its assessment, HSBC resumed coverage with an "underweight" rating and 790p target price, which contributed to the stock's decline by 32p last night to 848p.

Overall, the FTSE 100 was weak, easing by 38.14 points to 5,243.4 as traders expressed concern about the latest public sector net borrowing figures. The FTSE 250 was 60.36 points behind at 9,486.28. Anthony Grech, a market strategist at IG Index, said Friday's GDP numbers were likely to remain the focus of trading for the rest of the week. He added: "Expect the Bank of England meeting minutes and the CBI quarterly industrial trends survey today to be closely watched for further clues as to just what degree of growth might be seen."

Xstrata, which issued a production report for the third quarter, was among the weakest of the blue chips, falling 25p to 1002p. Evolution, which moved the miner's stock to "sell", said the market was "failing to take account of the negative effects of operating currency strength which, as Xstrata itself points out, detracts from US dollar commodity price strength". Charles Kernot, an Evolution analyst, added: "One of the company's non-executives, David Rough, sold £143,000 of shares at 1021p on Friday last week, and we now think others should follow."

In the wider mining sector, Vedanta Resources was 54p weaker at 2335p, while the Eurasian Natural Resources Corporation slipped to 929p, down 22p. Fresnillo, the Mexican silver mining group, was 16p lighter at 832p.

Over in the banking sector, Barclays fell further than Xstrata, losing 18.3p to 363.75p, after Qatar Holdings sold off 379.2 million shares in the group after exercising warrants at a price of 197.775p. The move energised the speculators, who quickly made a connection with Sainsbury's, which last week was the focus of rumours anticipating a bid from the Qatari sovereign wealth fund. Talk that the Middle Eastern investors were selling Barclays shares in order to raise funds for a tilt at Sainsbury's drove the supermarket's stock to pole position on the FTSE 100. it rose 5.4 per cent, or 17.7p, to 347.8p, despite traders playing down the probability of such a linkage.

Also on the upside, the oil and gas group BG firmed up by 8.5p to 1155p thanks to Deutsche Bank, which moved the stock from "hold" to "buy". "There are uncertainties, not least the outlook for LNG markets and execution risk on major projects," the broker said. "Our valuation analysis argues, however, that these are more than discounted in the current share price, with little allowed for the emerging uptick in production and profits." ARM Holdings, the semiconductor manufacturer, rose 2.9p to 160.6p as investors bought in following a strong earnings report from the American sector bellwether Texas Instruments, which hinted at a recovery, saying its customers had stopped running down their inventories.

Goldman Sachs undermined sentiment around Carphone Warehouse, which eased back 7.8p to 199.5p after the broker downgraded the stock to "neutral", highlighting the recent strong run in the share price in a new sector review. Elsewhere, Goldman reiterated its "buy" view on FTSE 100-listed Vodafone, saying it expected strong interim results from the group, which saw its shares close broadly unchanged at 133.55p, down 0.65p.

"First, we think [the guidance for 2010, issued in May] set the bar low as the macro-environment was deteriorating," the broker said. "Second, rising competitive risks in the US and India will not, in our view, translate into pressure on cash flow. Third, longer term, we expect Vodafone to be a passive beneficiary of in-market consolidation Europe with the potential to deliver substantial dividend growth as Verizon Wireless cash distributions resume."

Further afield, the chemicals group Yule Catto fell 1p to 175p as investors banked profits from recent gains. Morgan Stanley said that, notwithstanding the gains sparked by the group's trading update earlier this week, the shares remained "too cheap".

"The risk-reward trade-off remains attractive with 70 per cent upside to our new 300p bull case versus [the around] 38 per cent downside to our new 110p bear case," the broker said, reiterating its "overweight" stance with a revised 210p target price, compared to 190p previously.