Market Report: BAE wounded as Footsie claims new high

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The Independent Online

The defence group BAE Systems lagged behind as the FTSE 100 struck a fresh 21-month high last night.

The stock slipped to 380.2p, down 8.6p, after Goldman Sachs reiterated its "conviction sell" view and Bernstein, seeing the stock edging towards fair value and sales lagging behind US peers over the next five years, switched its stance to "market perform" from "outperform". Expressing a preference for Northrop Grumman and Lockheed Martin, Bernstein said the upside in BAE's margins was also limited, adding that while there is scope for expansion, particularly in the company's land and armaments division, "significant cost reductions will be needed in the parts of the business that are contracting".

Goldman took its cue from BAE's failure to win the recent Ministry of Defence contract for new armoured vehicles. The company was pipped to the post by America's General Dynamics, taking the tally of lost major land vehicle contracts to four in less than 12 months, the broker said, adding that it expected BAE's earnings to "peak in 2010 and then decline for a number of years". "We are increasingly concerned about the outlook for defence spending in the US and UK and see evidence of deteriorating terms of trade in US defence," Goldman explained, adding: "We also have concerns over BAE's loss of market share in US and UK land vehicles, and over BAE's pension deficit."

Overall, the FTSE 100 turned positive, closing at a new 21 month high as a round of positive company news offset nerves ahead of the Chancellor's Budget statement to Parliament today. The benchmark registered a session best of 5,695.94, before relaxing to 5,673.63, up 29.09 points, at the close, while the mid-cap FTSE 250 index rose by 38.18 points to 10,030.1. The oil and gas explorer and producer Cairn Energy and the insurance group Legal & General stood out, clocking gains of 30.1p to 408.9p and 3.8p to 85.1p respectively after positive results.

Miners were higher as metals prices firmed up in response to some weakness in the US dollar, with the Eurasian Natural Resources Corporation adding 44p to 1,194p and Lonmin advancing by 50p to 2,032p. Kazakhmys and Xstrata were also higher, gaining 29p to 1,505p and 20.5p to 1,161.5p respectively, while the iron ore pellet specialist Ferrexpo rose 30.2p to 340.6p on the back of positive preliminary results.

Elsewhere, Severn Trent lost 10p to 1,188p as traders switched out of defensives. The stock was also in focus after HSBC switched its view to "underweight", saying Severn offered less visibility to income investors when compared with United Utilities and Northumbrian Water, both of which are rated "overweight" by the broker. "[Northumbrian] offers the best visibility for dividend growth," HSBC said, raising its target for the water group to 325p and for United to 640p. Both were held back, with Northumbrian easing by 1p to 272p and United, which was the subject of some negative comment from Société Générale at the beginning of the week, retreating to 545.5p, down 7.5p.

Home improvement retailers were unsettled by the read-across from Carpetright, which slumped to 825p, down 101p, after warning on profits. The update knocked Home Retail Group, the Homebase owner, which lost 6.9p to 275p, and B&Q's owner, Kingfisher, which fell to 227p, down 6p. An uninspiring sector survey from the CBI also dampened the mood.

Over in the banking sector, traders focused on reports that the indebted Dubai World conglomerate was set to present restructuring plans to creditors this week. Standard Chartered was strong, building on the news to post a rise of 29.5p to 1,785.5p, while HSBC closed broadly unchanged at 675.8p, down 2.3p. Lloyds, up 1.9p to 63p, and Royal Bank of Scotland, up 0.28p to 44.06p, were in focus amid reports suggesting that the Chancellor will tell them to raise their lending targets when he presents the Budget today.

Further afield, the oil and gas exploration and production group Dana Petroleum was 24p stronger at 1,212p as speculators revisited bid theories. The chatter was prompted by a Goldman Sachs circular, with the broker saying that at current levels, "speculation on possible mergers and acquisitions activity from acquirers looking to purchase cheap production growth could provide support to the share price". "We believe that Dana's core assets valued at the oil forward curve continue to trade at a significant discount, meaning that the company's exploration programme is free," Goldman said, reiterating its "conviction buy" view on the stock.

Also on the upside, the paper manufacturer Mondi was 4p stronger at 476p after Royal Bank of Scotland, highlighting the company's exposure to emerging economies, adopted a "buy" stance. "Mondi's assets are located predominantly in emerging economies, which gives the company exposure to fast-growing markets and the benefit of lower costs for wood and labour," the broker said, setting a 540p target price on the stock, and anticipating a 45 per cent compounded annual growth rate in earnings over the three years to 2012.