Tesco drags FTSE lower as analysts deliver earnings verdict

Wed Feb 26, 2014 6:19am EST

* FTSE 100 index falls 0.3 percent

* Tesco hit by multiple target cuts a day after update

* ITV special dividend not enough to halt profit-takers

* Diageo also a drag as it trades ex-div

By Simon Jessop and Atul Prakash

LONDON, Feb 26 (Reuters) - A batch of analyst cuts prompted a rush to the exits for investors in retailer Tesco that weighed on the blue-chip FTSE 100 on Wednesday, dragging it further away from a recent multi-year high.

Nomura, Oriel, Cantor and Jefferies were among those that cut ratings or price targets on Tesco, the world's third-largest retailer, a day after it flagged price cuts and scaled back its operating margin goal.

Demand to sell out of the stock was strong enough to leave Tesco down 3.9 percent and on course to post its biggest daily fall since June 2013. There was heavy volume on the stock just shy of its three-month daily average and three times that in the broader index.

"You have to ask why investors need to be in this stock at the moment. I would advise caution on the stock," said Graham Jones, analyst at Panmure Gordon. "At least in the next six months, I don't see what's going to change at Tesco to make investors' sentiment more positive."

The scale of the weakness in Tesco weighed on the broader European retail sector and caused the STOXX Europe 600 Retail index, down 1.1 percent, to lag sectoral peers.

Tesco's heavy weighting within the FTSE meant it acted as a drag on the parent index and left it down 0.3 percent, or 20.3 points, at 6,810.14 points by 1042 GMT, although fund flows into Europe remain positive and many expect the fresh 14-year closing high hit on Monday to be extended in the coming weeks.

"Investors have become cautious as they think the market is due for a correction after rising too far, too fast. They are waiting for some catalysts before pushing the FTSE 100 towards record highs," Tom Robertson, senior trader at Accendo Markets.

"If we test 6,850, then we could be set for higher highs and the next target would be the all time high of 6,950.60. But if we fail to break through the 6,850 level in the near-term, the market would become vulnerable to more profit taking."

Also feeling investors' ire, and leading the FTSE 100 fallers in spite of plans to issue a special dividend, was broadcaster ITV, down 4.9 percent in volume twice its three-month average after less than three hours of trade.

That left the stock on course for its biggest daily fall since May 2012, with some traders pointing to comments around future investment as a reason to take profits on a stock that has been one of the best FTSE performers over 6 months.

"(The) results are all good but the extra investment in programming that they have announced today means no upgrades which is likely to take the gloss off their performance," an equity sales trader at a UK brokerage firm said.

Compounding the early weakness were falls for Diageo and easyJet, down 1.5 percent and 2.4 percent, respectively, after they began to trade without entitlement to the latest dividend payout.