Market Report: BAE Systems flies high on earnings hopes

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Although the FTSE 100 fell 19 points to 5,359, as investors booked gains from the index that on Wednesday achieved its best level since before the September 11 attacks, BAE managed to go higher.

Dresdner led the way by upgrading its stance on the defence and aerospace giant to "buy" from "hold", setting a whopping 450p price target on BAE's stock.

The German broker predicts BAE will generate earnings growth of more than 60 per cent in the next two years and, it hinted, this forecast might prove to be too conservative should the company secure further orders from Saudi Arabia. Presently, the main source of growth at the company comes from its exposure North America, Dresdner said.

Meanwhile, UBS lent its support to BAE. It urged investors to pile into the stock, although it set a more modest target price of 350p. The Swiss broker is convinced the earnings at the defence group are more reliable than in the past, thanks to its more diverse geographical split and the fact that it is taking on lower-risk contracts. UBS believes that a short-term boost to BAE shares is likely to come from a final agreement between the company and trade unions over pensions.

The upbeat comments from the duo helped BAE hit a high of 336.75p in the morning. Morgan Stanley used the rise to dump 30 million shares on the market on behalf of a client. This inevitably weighed on the company's shares, which closed 3.25p higher at 323p.

Elsewhere, dealers were surprised to see Exel notch up an 8p rise to a fresh high of 983p. Most expected the logistics group to lose ground on the back of a downgrade from HSBC Securities. The cautious broker cut back its stance to "underweight" from "neutral".

As has been the case for many months, those buying into Exel yesterday were betting that the company will soon receive a takeover offer.

Reuters was 1.25p lower at 364.75p after Deutsche Bank removed the financial information provider from its "European Focus List", which consists of the broker's favourite 15 stocks in Europe. Although Deutsche approves of the latest restructuring programme at Reuters, it does not expect the full benefits of the project to feed through until 2008.

Despite Stelios Haji-Ioannou's insistence that he and his family have no plans to sell their 41 per cent stake in easyJet, punters continued to pile into the group's shares, sending them 20p higher to 304.5p. Investors are convinced that a bid for the no-frills airline is imminent. If there is going to be an offer for the company, it will probably come from Icelandair, which raised its stake in easyJet to 13 per cent this week.

Serco gained 8p to 254p after winning a contract that has the potential to add up to £400m to the company's order book. The deal will see Serco provide new laboratory and office facilities to the Government's Defence Science and Technology Laboratory.

The ongoing gains being notched up by British Energy shares - they climbed19p to 471p yesterday - are great news for the US venture funds that bought into the company last year through its distressed debt.

Marshall Wace, Farallon Capital and Appaloosa Management acquired BE debt at knock-down prices because, back then, the electricity generator looked to be heading towards administration. This debt was converted into new equity early this year, saving the group from collapse. Since then these new BE shares have almost doubled, leaving the venture funds involved sitting on massive capital gains.

Lower down the pecking order, Morgan Sindall fell 15.5p to 799.5p after its chairman, John Morgan, sold 1.5 million shares at 800p. Mr Morgan, who bagged £12m from the disposal, retains a 10 per cent stake of 4.3 million shares in the construction company. European Convergence Property ticked 0.01p better to 1.07p on talk the property tiddler is close to making an acquisition in Eastern Europe.

Alpha Strategic listed on AIM at 100p, having raised £3m from institutional investors through the broker Teather & Greenwood. The company aims to make money by investing in hedge-fund management firms and is led Colin Barrow, formerly of Man Group. Its shares closed at 110.5p.

Ely Property also floated on the junior market at 5p and finished its maiden session at 5.25p. The Dublin-based group operates an extremely tax-efficient sale-and-leaseback investment scheme in the Irish residential and student property markets.