Tesco was in demand on talk it is poised to make an aggressive move into home shopping, hitting potential rival GUS. That came as London's top stocks made little progress, with Vodafone a notable casualty as fears deepened over its earnings outlook.
The FTSE 100 Index closed lower by 3.3 to 5820.1, having swung about 50 points either side of the plimsoll line through the session. That follows the FTSE yesterday closing down 37.1 just points -- well off its early low of 5752.6 as traders reacted to the news that suspects were being questioned about an alleged plot to detonate bombs on airlines bound for America.
Over the week, the UK benchmark has lost 1.2 per cent.
Across the Atlantic, the Dow Jones Industrial Average drifted 31.8 to 11092.6 after Apple Computer would delay its latest quarterly report because of irregularities related to past stock-option grants. Wall Street was also pressured by weak earnings from Analog Devices and graphics card maker Nvidia, and by stronger than expected retail sales for July.
For an overview of world markets here.
Heading the FTSE leaderboard, Tesco firmed 8.25p to 373.25p on speculation the supermarket will be launching a shopping catalogue in the first week of September.
Despite widespread gossip that Tesco has been poaching staff from Argos and reorganising its internet division, the grocer has so far commented only that it is continuing to investigate options for its non-food business.
According to industry gossip, Tesco will have an initial print run of at least 15 million, in order to distribute the catalogue to its 13 million Clubcard members, as well as distributing through its 1200 convenience stores and most of its 700 supermarkets. That, according to analysts, would point to sales potential approaching £1 billion.
Morgan Stanley analysts had been expecting a catalogue print run of only 5 million. They said the venture could add between 2 and 3 per cent to group sales in the medium term, up from its previous forecast of 1 to 2 per cent. Tesco's UK division currently generates more than £32 billion in turnover.
GUS, owner of rival Argos, was down 16p to 957.5p.
Separately, Cazenove was tipping Tesco among its "fab four" safe havens in the FTSE 100 -- a category it judged by earnings stability, possible threats to cashflow generation and management policies.
Tesco, it said was the least risky blue chip stock, with its 12 month forward earnings yield of 6.9 per cent presenting a "compelling mis-pricing of risk". Other stocks favoured by Cazenove were Gallaher (up 3.5p to 893p), GlaxoSmithKline (ahead 6p to £14.52) and United Utilities (unchanged at 667p).
For detailed information on Tesco, click here.
Schroders was the weakest of the blue chips, with its voting shares falling 91p to 872p after broadly in-line interim results from the fund manager revealed a tricky second quarter during the equity market's mid-May wobble. Weak institutional fund flows provided the main source of disappointment.
Group profits were a fraction below the City consensus, rising 7 per cent to £132.3 million, or ahead 28 per cent stripping out one-offs in the previous year. The outlook statement was bland, saying little more than that 2006 would be a "year of consolidation".
Schroders also revealed its asset management arm suffered a net outflow of client money during the period, with £4.6 billion in withdrawals by institutional clients outweighing £2.3 billion inflows on the retail side. Its funds under management totalled £122.3 billion by the end of June, down from £122.5 billion six months earlier.
Read Schroders' statement here.
Vodafone retreated for a second day following a profit warning from Deutsche Telekom, its main rival in the core German market, where the UK firm generates 19 per cent of revenues. Telekom yesterday said it would cut tariff prices on its T-Mobil network in half, a move that is likely to force Vodafone to respond in kind.
Analysts at JP Morgan downgraded their Vodafone rating yesterday, arguing that price pressure in Germany would force Vodafone's earnings estimates well below current consensus levels. Today, both ABN Amro and Citigroup moved to "hold" from "buy".
ABN's team told clients that Vodafone shares could be worth just 98p on a "doomsday valuation". It worried about a surprise move by the Dutch telecom regulator to cut domestic termination rates by 50 per cent, which has initially seen as a rogue action but has since been mirrored in proposals by Spanish and Swedish authorities.
"The danger is that more markets may follow, and the Dutch example becomes the new benchmark," ABN told clients. It also noted further regulatory pressure on roaming charges and text messages.
The broker's worst case scenario, based on all European markets adopting the Dutch pricing, would hit Vodafone's 2008 earnings per share by 24 per cent. However, that did not factor in increased usage triggered by price cuts, potential cost savings, or that companies may be able to claw back revenues in other areas. That led ABN to a target price of 122p on Vodafone shares.
Citigroup was less bearish, although it saw thin management the main impediment to stock performance. That follows Bill Morrow, head of Vodafone's European side, resigning last month.
"Vodafone is worth over 150p if it executes well, but the market needs confidence that environmental factors (competitive prices, regulation) won’t overwhelm management efforts. We doubt this will be clear this year and so it’s likely that a market multiple is the best we can hope for 124p, plus dividend," it told clients.
The stock closed lower by 2p to 110p.
Track Vodafone shares here.
Among the mid-caps, Premier Oil lost 16.5p to 998.5p after the explorer abandoned a test well, its second failure so far this month.
The onshore Al Amir-2 well in Egypt was considered on of Premier's relatively low risk prospects after initial tests of the field, in April of last year, showed a flow of 750,000 barrels a day. But follow-up tests found only traces of oil at uncommercial levels, Premier revealed today. It added that follow-up drilling may take place.
While a blow to sentiment, the prospect was not overly significant in earnings terms, with analysts valuing Al Amir worth about 25p per Premier share if it can be developed commercially.
Read Premier Oil's statement here.
Enodis rallied 4p to 169p after Merrill Lynch raised the industrial kitchen equipment maker to "buy" from "hold". That follows Enodis yesterday rejecting requests from US rival Middleby Corp for access to its books, sending shares lower by about 8 per cent, and revealing earlier in the week that bid talks with US peer Manitowoc had collapsed.
"The market has reacted badly to Enodis’ inevitable refusal, presumably assuming that it will cause Middleby to walk away. However we wonder if this is part of Middleby’s strategy - an implicit threat to end talks, which makes its 195p offer appear more attractive?" speculated the broker.
Merrill said the risk-reward balance "has become interesting again", based on its standalone value of 187p for the stock. The broker's team also noted that, if Middleby does bid, it will not be allowed by the Takeover Panel to offer less than its initial 195p approach.
Track Enodis shares here.
In the smaller caps, AEA Technology added 10.5p to 111.5p after proposing the sale of its rail, nuclear and north American engineering businesses for a potential £76.4 million.
AEA group will focus on becoming an environmental consultancy, advising governments and major organisations on policies such as energy and air quality. Stock market darling RPS, down 0.25p to 224p, is currently the only major listed environmental consultancy on the London.
On broker watch:
Teather & Greenwood cut Schroders to "hold" from "buy".
Bridgewell Securities raised Paragon to "overweight" from "neutral".
WestLB downgraded Scottish & Newcastle to "hold" from "buy".
Altium upgraded Game Group to "buy" from "hold".
Cazenove raised Unilever to "outperform" from "in-line".
Dresdner Kleinwort raised Rok to "buy" from "add".
Investec moved Rank Group to "buy" from "reduce".
And Seymour Pierce lifted Cobra Biomanufacturing to "buy" from "outperform".
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