FTSE in-depth: Imagination is running away

By Simon Duke for MailOnline
Updated: 08:32 EDT, 20 October 2009

Monday: Gains in the mining and energy sectors saw the FTSE 100 push higher.

In Britain's microchip industry the difference between the haves and the have nots has never been starker.

Great rewards beckon for the likes of Imagination Technologies and ARM Holdings, hose designs are becoming indispensable to the new wave of mobile phones that double up as powerful pocket-sized computers.

Then there is Wolfson, whose unceremonious ejection from the new Apple iPhone has triggered a brace of profit warnings recently.

Imagination, in particular, has been on a spectacular run after finding favour with the US tech giant, which is using the UK firm's graphic chip designs in its iconic touchscreen phones.

Hopes that third-quarter results from Apple last night would include an upgrade to its iPhone sales forecasts sent shares in Imagination soaring 20.4p or 9.7% to 231.9p - a level not seen since early 2001.

With Imagination designs expected to be sold into more laptop and netbook manufacturers, the group expects its patents to be used in around 200m devices worldwide by 2011.

But Nick James of stockbroker Panmure Gordon believes Imagination can hit these targets much more rapidly.

This would have profound implications for the company's profits, as Imagination receives a royalty each time a device containing one of its patents is sold. Once the Hertfordshire-based group covers its research and development costs, any additional royalty payment drops straight to the bottom line.

The seven-fold rise in the Imagination share price over the past year has not been driven solely by the prospect of supercharged earnings. Investors are also betting on a knockout bid emerging at some point in the future. Following a summer raid, Apple raised its stake to 9%, while Intel - the world's biggest chip maker - is sitting on a 16% holding.

Shares in ARM rose 5.1p to 157.7p ahead of results from Apple and Texas Instruments. Wolfson closed down 1.25p to 125p.

Further gains in the mining and energy sectors saw the FTSE 100 push higher again in early trading on the 22nd anniversary of the 'Black Monday' stock market crash.

The rally gained impetus after Wall Street opened 80 points higher on the back of a further batch of better-than-expected US corporate results, but profit-taking saw US markets give back their gains later on.

This time it was the turn of US newspaper giant Gannett and industrial firm Eaton Group to defy expectations, sending the Footsie up 91 points to a 13-month high of 5,281.54 by the close.

Oil stocks were once again in the vanguard as the price of a barrel of crude rose for an eighth straight day to hit a fresh one-year high of $79.05. BP surged 15.1p to 574.1p, Royal Dutch Shell jumped 44p to 1,903 and Tullow Oil added 9p to 1,245p.

Mounting hopes for a potent rebound in the global economy also continued to propel metal prices higher, lifting Anglo American 104.5p to 2,304p and pushing Vedanta up 77p to 2,389p.

The UK's bailed-out banks were among the few blue chips to have bucked the positive trend. Lloyds Banking Group shed 1.01p to 92.09p amid signs that short-sellers are preparing to attack the lender ahead of its mooted £25bn fund raising, which could come by the end of the month.

Royal Bank of Scotland drifted 0.09p to 46.91p as shareholders also braced themselves for a meaty cash call.

Cable & Wireless was another notable laggard, falling 0.3p to 138.8p after Citigroup cut its rating on the telecoms giant to 'hold' from 'buy' ahead of first-half results next month. Slashing its price target by 95p to 155p, the Wall Street giant warned of further disappointment from C&Ws overseas and 'greater uncertainty' over management's plan to split the company in two.

A broker downgrade also took some of the heat out of oil services group and perennial takeover target Wellstream, which closed down 17p at 563p. Swiss giant UBS advised its clients to 'sell' their shares following a recent profit warning. It also noted that Wellstream's chief operating officer recently dumped half his stake in the group.

Cash-for-bangers schemes aimed at revving up car sales is helping to boost profits at metal basher Senior, up 3.25p higher at 66.75p. The group, which also sells to aerospace giants Boeing and Airbus, expects full-year results to race past expectations.