Broker tips: BAE Systems, IAG

BAE Systems was under the cosh on Monday after Bank of America Merrill Lynch downgraded shares of the defence company to 'neutral' from 'buy'.

The US bank said that after a very strong run driven by positive revisions and a re-rating, it sees limited near-term valuation upside. The shares are up 23% year-to-date.

BofA noted that BAE has the "most attractive" capital allocation within the EU defence sector.

British Airways owner IAG's stock was making gains on Monday following positive comments from JPMorgan, which said that earnings momentum should continue to take the shares higher as it reiterated its 'overweight' position on the stock.

Despite the recent rally – the stock has gained more than 30% since 5 March – JPMorgan said price growth, cost execution and lower disruption should benefit results in the coming quarters.

First-quarter results from IAG last week showed a "small beat" in earnings before interest and tax (EBIT), said JPM. Meanwhile, strong pricing reinforces the bank's confidence over full-year results, while cost pressure from investments and wages is "likely to fade".

"We continue to see an opportunity for IAG to outperform consensus expectations, where we are now c8% above company consensus EBIT for 2024E, pre any moves in consensus, despite the start of a re-investment cycle (higher opex/capex)," JPM said. "The re-investment back into the business should then benefit longer-term earnings, with management on the call stating they expect British Airways could recoup its c€500m EBIT shortfall vs. 2019 over the next 1-2 years."