Market Report: Stagecoach stands firm as market falls

A plug from Bank of America-Merrill Lynch shielded Stagecoach from the downdraft unsettling the wider market last night.

The rail and bus operator closed up 0.5p at 129.25p after the broker told clients to buy, playing down concerns about the group's exposure to the British rail market and, in particular, through its South West Trains (SWT) franchise, which provides commuter services to the south-west of London.

Worries about the latter have been mounting as the number of unemployed people increases. More people out of work, it is feared, implies less business for SWT, which is in arbitration to clarify the point from which revenue support from the Department of Transport should be calculated.

Merrill estimates that a maximum of £70m is at risk if revenue support is assessed from February 2011, as the DfT contends it should, rather than from April 2010, as SWT argues.

"There is also a dispute on the inclusion or not of car part revenues versus the revenue targets. Once in revenue support, we believe that even if revenues are well below target, SWT could still break even," the broker said, setting a revised 190p target price on the company's stock.

Overall, the market veered sharply lower after the credit rating agency Standard & Poor's moved the outlook on the UK's sovereign ratings to negative. The FTSE 100 index slid by 122.94 points to 4345.47 and the FSTE 250 was down 221.64 points at 7512.37.

S&P expressed concern about Britain's net general government debt burden. It said that, even after factoring in further fiscal tightening, it could approach 100 per cent of gross domestic product and remain at about that level in the medium term. The assessment spooked investors and there were only four blue-chip stocks in the black at the close of play, with Tullow Oil leading the way at 980p, an increase of 34p .

A flight for safety supported defensive pharmaceuticals stocks, keeping both GlaxoSmithKline, up 5p at 1063p, and AstraZeneca, up 11p at 2646p, steady despite weak sentiment in the wider market.

On the downside, the banks were hit by S&P's concerns about the British economy, with Lloyds Banking Group losing more than 5 per cent or, 3.8p, to close at 66.7p and Royal Bank of Scotland retreating to 39.9p, a fall of 2.5p, or almost 6 per cent.

Cable & Wireless fell back by 15p, or more than 9 per cent, to 142p after it posted its results and Investec said "the cracks are starting to show".

The shares were also hit by speculation in the morning that a director had cashed out by selling some shares. It later emerged that while the chairman had bought stock, Tony Rice, the head of Cable & Wireless's international business, had indeed disposed of three million shares he held.

Elsewhere, Icap retreated by 9.1 per cent, or 36.75p, to 367.25p in response to news that its chairman, Michael Spencer, had scaled back his stake in the business to 19 per cent from about 21 per cent. The change emerged in a regulatory filing posted overnight and showed that IPGL, an investment vehicle majority-owned by Mr Spencer and his family, had sold part of its holding.

Further afield on the FTSE 250, apart from Stagecoach only a clutch of stocks managed to trade higher, with Sports Direct rising 5.4 per cent, or 3.8p, to 73.75p. Barratt Developments also managed to stay in positive territory, rising 1.25p to 163.5p after Credit Suisse moved the stock from "neutral" to "outperform" as it turned positive on the housing sector, citing recent trends in the property market, industry forward indicators, the stabilisation in credit availability and its own economic forecasts.

"We think this is a critical inflexion point in the housing cycle from an investment point," the broker said, adding that, while the market might not have reached an absolute trough, "a period of stabilisation, at the very least, is imminent".

Others companies were less fortunate, with Taylor Wimpey, which was also moved to "outperform", falling prey to the general trend and easing back by 0.75p to 33.25p.

ITV was also held back by the weakness in the wider market, losing 3.2 per cent, or 1p, to 30p despite UBS, which maintains a "neutral" rating on the broadcaster's stock, raising its target price from 20p to 34p.

In the pubs sector, Mitchells & Butlers lost 9 per cent, or 23.5p, to close at 237.75p, after unveiling further losses on a long-term swap. The company also announced the departure of its chief executive, Tim Clarke.

Yell, which posted its full-year earnings report during Wednesdays' session, was 11.7 per cent, or 5.25p, behind at 39.75p after analysts at RBS scaled back their target price for the stock from 74p to 45p, saying that an equity raising now looked likely.

"Whether by design (i.e. management chooses to refinance) or default (at the bequest of lenders), a wholesale balance sheet restructuring seems likely towards the end of the current financial year," the broker said, keeping the stock at "hold". The company's joint house broker, Bank of America-Merrill Lynch also weighed in, moving the stock from "neutral" to "no rating".