Market Report: Sun shines on undervalued travel stocks

TUI Travel stood firm even as the wider FTSE 100 fell back last night. The company gained ground as bargain hunters bought in on the view that the tour operator was undervalued.

Panmure Gordon said the market was being unduly pessimistic about TUI's prospects, pointing out that the group's own quarterly survey of customers, for instance, showed an improvement in sentiment, with people feeling more secure about their jobs and financial situations. Moreover, there was no indication of a reduction in planned holiday spending in any of the group's major source markets. This should boost holiday sales and suggests that the company is correct to plan for no material reduction in capacity for the summer 2010 season, the broker explained.

"We think consensus estimates are too low and the current valuation reflects the market's view of a more difficult trading environment than current booking trends are indicating," Panmure said, reiterating its "buy" stance on the stock. The assessment drove TUI to 250.5p, up 3.7p. Sector peer Thomas Cook was also strong, closing at 221.2p, up 4.2p. Of the two, however, Thomas Cook is expected to be demoted to the mid-cap FTSE 250 in the upcoming index review.

Overall, the FTSE 100 was 11.7 points behind at 5310.66, while the FTSE 250 fell by 22.7 points to 9173.25. The blue-chip index was held back by losses in the banking sector, with Lloyds Banking Group retreating to 53.69p, down more than 4 per cent or 2.31p, and Barclays falling by 2.1 per cent or 6.45p to 297.05p, with traders attributing the weakness to nervousness ahead of the pre-Budget report. A windfall tax on bank profits is likely to trigger a sharp sell-off, they said.

Royal Bank of Scotland was the weakest, declining by almost 5 per cent or 1.63p to 33p, despite some words of support from Evolution Securities, which upped its stance on the stock to "buy" from "sell", citing valuation grounds. Weighing in on the wider sector, the broker said that "European banks are not completely out of the woods yet", adding: "While the wave of capital and structured credit writedowns seems for the most part to have passed, other issues (impairments, liquidity, low interest rates, more stringent regulation) will keep the pressure on."

Elsewhere, parts of the mining sector were weak, with stocks such as the Eurasian Natural Resources Corporation, down 2.1 per cent or 19.5p at 901.5p, and Fresnillo, down 1.8 per cent or 15.5p at 849.5p, falling back in response to a firmer US dollar. Strength in the greenback pressured metals prices, which in turn bore down on mining equities. Not everyone was held back, however. Antofagasta, for instance, rose by 20p to 920.5p, while Rio Tinto, which recently sealed its iron ore joint venture with BHP Billiton, added 44.5p to 3169.5p. As for BHP, it finished the day 20p ahead at 1910.5p.

Reports that Dubai World may move to offload overseas assets as part of its debt restructuring process unsettled sentiment in the commercial property sector, with Liberty International easing by 3.4p to 467.6p and Hammerson losing 1.9p to 406p amid worries about the conglomerate's real estate assets in the UK. Land Securities was also held back, retreating by 6.5p to 678.5p as the concern offset the impact of some words of support from Deutsche Bank, which reiterated its positive view on the stock.

"We continue to believe that the recovery in UK commercial real estate values will be faster than many commentators are anticipating," the broker said, citing the influence of historically high property yields and a shortage of properties for sale.

Further afield, HMV ignored a cautious Morgan Stanley circular, rising 3.4 to 114.4p despite the broker saying that its consumer survey suggested that "video games demand will remain lacklustre". "Our findings support our pessimistic expectations for HMV, as 20 per cent of UK sales are video games," the broker said, adding that of the general retailers, it preferred FTSE 100-listed Next, which was 5p behind at 2054p, and Debenhams, which was 0.2p weaker at 84p.

Hays, the staffing group, was 1.45p behind at 98.95p, as investors banked profits from Friday's gains. The stock had rallied on the back of the latest US non-farm payrolls report, which was far better than expected, with the American economy losing only 11,000 jobs in November, compared to market estimates of around 130,000. The pullback came as ING questioned the numbers, saying that "the only potential fly in the ointment of this labour report is how believable it is".

Back on the upside, Dignity, the funeral services group, was 9.5p stronger at 580.5p thanks to UBS, which revised its stance on the stock to "buy" from "neutral", setting a revised target price of 650p, compared to 635p previously.

"Dignity has [a net debt to Ebitda ratio] of under 4 times, well below its target level of gearing at 6 times," the broker said, adding that it saw a "strong possibility" of the company moving to increase gearing in the next 12 to 18 months "by way of a bond issue and return of cash to shareholders".