Market Report: Goldman parks its tanks on BAE's lawn

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BAE Systems was held back last night as Goldman Sachs suggested that investors "sell" into a prospective share price rally next week.

The defence group, which closed at 342.75p, down 2.25p, is vying for a lucrative US contract to build thousands of specialist vehicles for use in Afghanistan. The contract for M-ATVs, as they are known, would provide a significant boost to the winner, potentially unlocking billions of dollars worth of sales. The Americans are expected to select a supplier next week, and BAE's success with similar programmes makes it one of the two favourites out of a field of four prospective candidates, Goldman said, highlighting the possibility of a share price rally next week. But despite the prospect of a win, the broker remained negative, arguing that a strong run "could be an opportunity" to sell.

The broker's negative stance is down to a number of concerns, including its view that the US defence investment budget has peaked, so BAE's US sales are likely to fall from 2011, and that the group's pension deficit could rise further with the first-half results. Goldman also reckons that US defence margins are likely to slip, "as the new administration implements procurement reform", and that on this side of the Atlantic, the UK defence budget may be cut as the Government deals with the budget deficit.

Overall, it was a quiet day on the equity markets, with the FTSE 100 easing slightly to 4241.01, down 11.56 points, and the FTSE 250 firming up by 42.95 points to 7386.26.

The banking sector was mixed, with Royal Bank of Scotland, up almost 4 per cent or 1.37p at 38.125p, supplementing earlier gains, but Lloyds easing slightly to 66.49p, down 0.01p. Barclays, down 1.65p at 268.1p, was also weak, as UBS weighed in, maintaining its "sell" stance on the stock.

"Unlike its peers, that have [to either] manage legacy assets or to work through a credit cycle, Barclays has to handle both, which will depress returns at least until 2011," the broker said. "Moreover, while the group has ambitions to build up its retail/commercial businesses outside the UK, there are cyclical challenges here and eventual returns may never match those of its established businesses in the UK/Africa."

Standard Chartered, which issued a pre-close update earlier this week, was 0.7 per cent or 8p behind at 1159p. ING increased its target price for the stock to 850p from 600p on the back of the statement, but stuck to its "sell" stance. Collins Stewart, on the other hand, reiterated its "buy" recommendation and raised its estimates by around 10 per cent to reflect the update. "On outlook, management does allude to 'tentative signs' of improvements in some markets whilst still seeing stress in other areas – this is marginally more positive than the [5 May] statement which simply alluded to 'challenging' conditions," the broker said.

Marks & Spencer fared better, rising to 312p, up almost 3 per cent or 9p, as traders looked ahead to the retailer's first-quarter update, which is due next week. Analysts expect an improvement in the company's sales performance, owing to the warmer weather, the timing of Easter and better trends in the wider sector.

Along with Next, which gained 14p at 1466p, M&S was also supported by news from John Lewis, which said that the week to 20 June had been the best of its financial year so far.

On the second tier, Ladbrokes fell to 178p, down almost 4 per cent or 7.25p, after Credit Suisse moved to reduce its target price for the company's stock to 197p from 202p in a new sector review. William Hill, whose target was moved to 200p from 193p, was also weak, retreating to 194.75p, down 1.9 per cent or 3.75p.

"We have neutral ratings on both William Hill and Ladbrokes, but of the two, we currently prefer William Hill, principally due to lower regulatory and financial risks," the broker said. "Operationally, it generates higher Ebit [earnings before interest and tax] per shop and a higher Ebit margin than Ladbrokes. It also has a lower presence in Ireland, where a regulatory review of taxation is under way and where competition is high."

On the upside, International Personal Finance (IPF) rallied to 75p, up more than 12 per cent or 8.25p, after posting an in-line trading update, prompting Numis, which said IPF was the only recovery play in the sector that was "not up 100-200 per cent", to reiterate its "buy" stance.

"All the recovery stocks in the sector that we cover, even those with serious questions about their survival, have at least doubled from their lows," the broker said. "IPF is the exception and is being valued at two times last year's underlying earnings from Eastern Europe."

Elsewhere, the housing sector was mixed following figures from the Land Registry, which showed that while the pace of decline was slowing, house prices in England and Wales were still falling. Persimmon eased to 348p, down 1.4 per cent or 5p, in response, while Redrow strengthened to 195.75p, up 1.3 per cent or 2.5p. Berkeley, which posted full-year numbers yesterday, was also firm, gaining 1.4 per cent or 11p to 816.5p.