SMITHS GROUP, the industrial conglomerate, found itself on most traders' sell lists yesterday after a hard-hitting note from Morgan Stanley cautioned that the company's interim results in March could disappoint and that Smiths may have to issue a profits warning for the full year.
Such comments left Smiths shares the worst performer in the FTSE 100 index, down 27.5p at 626.5p. At present, the group's management team are targeting flat underlying earnings in 2004 but Morgan Stanley believes they are unlikely to hit this target. "This reflects both tough operating conditions for the group's businesses as well as the impact of the weak US dollar," said Morgan Stanley.
Therefore, the US broker slashed its recommendation on Smiths to "underweight" from "equal weight" and cut its earnings forecasts. It predicts that others in the City will soon follow suit and believes this will result in further pressure on the group's shares as their valuation becomes more stretched.
If Morgan Stanley is to be believed, Smiths' more long-term prospects are also far from encouraging. The broker is of the view that Smiths faces several structural challenges going forward which, should they actually emerge, would have serious implications for growth at the company. "We argue that Smiths is now of a size whereby its tradition of making small bolt-on acquisitions is unlikely to be able to drive the earnings and cash flow growth that the market expects," warned Morgan Stanley.
Meanwhile, dealers reported heavy shorting of Prudential late on during yesterday's session, which left the stock 12.75p lower at 481.75p. Two conflicting rumours about the insurer did the rounds of the Square Mile. The first talked of a bearish trading statement from the group, possibly before the end of the week. Prudential is due to post full-year results next month. The second merely repeated a long- held view by some in the analyst community that the insurer is in need of a rights issue and suggested that an announcement could be imminent.
Vague bid talk surrounded Invensys but the speculation was not enough to get shares in the engineering conglomerate moving. They ended unchanged at 20p while market professionals suggested that the talk is merely wishful thinking by stale bulls of the stock.
Dealers had expected yesterday's profits warning from Brown & Jackson to weigh heavily on Woolworths given that both are at the same end of the retail sector. Woolworths, however, defied expectations and ended 1.25p higher at 45.25p as nearly 40 million shares changed hands.
Although most analysts are of the view that Woolworths has also had a poor Christmas some suggested the group may have contributed to the misery at Brown & Jackson by winning business from them. If true his could help Woolworths reach City targets, they argued.
Celltech fell 2.25p to 363.25p after it emerged that its rival, Teva, had received the green light from US regulators for its metolazone tablets, a generic version of Celltech's Zaroxolyn product. As a result Celltech now faces three generic competitors for Zaroxolyn, a drug that is expected to account for about 10 per cent of total product sales at the company.
"This is bad news for the group because its pharmaceutical portfolio may erode earlier than expected," commented Credit Suisse First Boston. The Swiss broker cut its estimate for Zaroxolyn sales. CSFB also reduced its forecast for Celltech's Tussionex product after it discovered that an undisclosed company is seeking approval for a capsule version of the drug from the US Food & Drug Administration.
A disappointing drilling update sent Cairn Energy 21.5p lower to 375p. The fact that Deutsche Bank downgraded its rating on the oil and gas explorer to "hold" from "buy" in the wake of the statement put added pressure on the stock. Although Cairn said it had encountered hydrocarbons in 10 out of the 14 wells it drilled at its Rajasthan field in western India, it warned that a significant amount of additional drilling work still needs to be done in order to evaluate properly the 5,000 square kilometre area.
Wood Group fell 2p to 125p after JP Morgan downgraded its recommendation on the oil service specialist to "neutral" from "overweight". "This downgrade is justified by the recent trading statement from Wood which outlined a poor 2004 outlook. We now anticipate a mere 3 per cent year-on-year growth in net income for the company," said the US broker.
Umeco jumped 15p to 392.5p after unveiling a major contract win with Bombardier worth about pounds 40m to the group. Premier Asset Management put on 1.5p to 56p in response to the purchase of 19,000 shares at 52.5p by Jonathan Fry, joint managing director at the company.
Iomart rose 1.75p to a year high of 51.5p as gossips talked of a series of contract wins for the group's portfolio of network security products in the near future. Character Group gained 4.5p to 148p on whispers that the intellectual property company is close to securing a Europe-wide distribution agreement for its products with an Italian company.
Copyright 2004 Independent Newspapers UK Limited
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