Market Report: Bargain hunters fuel Arriva's advance

The transport group Arriva raced ahead as bargain hunters piled in last night, with the stock climbing by more than 6 per cent after Goldman Sachs highlighted the "compelling valuation".

The broker said the shares, which are trading close to trough levels on various metrics, were likely to climb higher as European unemployment trends stabilise. Jobless levels should peak in 2010, which in turn should bring the prospect of a recovery in passenger numbers in 2011 in focus. Moreover, declining hedged fuel costs should boost the UK bus and the European operations, which should see double-digit profit growth in 2010.

The company also stands to benefit from the fact its CrossCountry franchise qualifies for revenue support from 2011. This should translate into "significant earnings growth" for Arriva in 2012, as forecasted losses from the franchise reverse, Goldman analysts explained, switching their stance on the stock to "conviction buy" from "sell", with a revised 580p target price, compared to 360p previously.

The punters soon piled in, driving Arriva to 486.6p, up 28.1p. The wider sector was less successful last night, with Firstgroup easing by 1.5p to 408.8p and Go-Ahead declining to 1367p, down 26p. National Express, which recently unveiled a £360m rights issue, was broadly unchanged at 340p, up 0.4p.

Overall, the FTSE 100 paused for breath, easing by 36.74 points to 5345.93 as traders banked profits from Monday's gains. The mid-cap FTSE 250 index was similarly unsettled, declining by 122.12 points to 9401.15. David Jones, chief market strategist at IG index, said the market's reaction to official figures showing that the consumer prices index, a key measure of UK inflation, had climbed to 1.5 per cent in October from 1.1 per cent in September was "negligible". "Inflation is likely to staff the radar in the months to come, but with the price of oil already having almost doubled this year – and with $100 per barrel not looking a ridiculous target for 2010 – it could well provide central bankers with come challenges further down the line," he added.

The miners were among the losers on the benchmark index, falling back as the US dollar began recovering from Monday's weakness. Lonmin, for instance, lost 3.3 per cent or 57p to 1683p, while Rio Tinto relaxed to 3232.5p, down 72.5p. Xstrata was 18p behind at 1075p and Anglo American lost 43p to 2610p. Antofagasta was also held back last night, retreating to 923.5p, down 10.5p.

On the upside, the banking sector was in focus, with Lloyds Banking Group climbing by 0.51p to 91p after it emerged that chairman Sir Win Bischoff had joined the roster of shareholders by purchasing 250,000 shares at 89.691p apiece. With his new stake in place, Sir Win can now take part in the bank's rights issue, which is open to those who are shareholders as of Friday this week.

The Royal Bank of Scotland, up 0.325p at 37.785p, was supported by ING, which abandoned its "sell" stance on the stock, saying that the recent weakness had left RBS trading close to its 37p forecast of trough tangible book value in 2011. The broker remained cautious, however, saying that, on a longer term view, "the ingredients needed to justify sufficient upside and therefore a buy rating on RBS are also absent". Consequently, ING now maintains a "hold" rating on RBS, with a revised 40p target price, compared to 46p previously.

Elsewhere, the supermarket group WM Morrison rose by 3.4p to 295.5p after Société Générale weighed in ahead of the company's third quarter sales report, which is due later this week. The broker said that while its estimate of like-for-like sales growth of 5 per cent would represent a slowdown from the 7.4 per cent achieved in the second quarter, recent data from the market researcher TNS suggest a pick up in the last month. "This would imply that Morrison is adding enough extra volume to offset the worst effects of slowing inflation," SocGen added, raising its target price for the stock to 338p from 311p.

Balfour Beatty, down 0.4p at 276p, Carillion, down 3.5p at 309p, and Interserve, down 8.8p at 229.6p, were in focus as UBS considered the impact of the phase of fiscal austerity that is likely to set in regardless of which political party wins the next UK general election, saying the three, while at some risk from cutbacks, were among the companies that could to benefit from increase used of public–private initiatives. Serco, down 3p at 528p, and Mitie, down 3.6p at 241.3p, were among those that could see gains from more widespread use of outsourcing, the broker added.

Further afield, Dana Petroleum drew stream from a round of bid rumours. The oil & gas group touched a session high of 1330p, up 5 per cent, as speculators mooted the possibility of interest from BP, the oil major which was broadly unchanged at 587.5p, down 0.8p. Traders, although unconvinced by the chatter, highlighted rumours suggesting a bid price of up to 1800p. RWE, the German group which has been linked with Dana in the past, was also mentioned as a possible suitor. At the close, Dana was 26p stronger at 1293p.