Broker tips: BAE Systems, IAG, Debenhams

Analysts at Berenberg pared their earnings estimates for BAE Systems, while highlighting the risk that the debate surrounding the UK’s maritime defence budget might drive negative sentiment in the backhalf of 2016, which led them to downgrade their recommendation.

The June Defence Committee meeting had suggested potential slippage in the production phase of the Type 26 Combat Ship, although a later incremental award of £472m would likely bridge any initial impact of a production delay, the broker said.

Nonetheless, the possibility existed that the issue might drive negative sentiment towards the Aerospace and Defence contractor in the back-half of the year in so far as it fuelled concerns about an over-committed UK maritime budget.

In parallel, and following the company’s 2015 preliminaries, analysts Charlotte Keyworth, Andrew Gollan and Ross Law lowered their
earnings estimates for the company in fiscal years 2016, 2017 and 2018 by between three to four percentage points.

As a result of all the above, the broker downgraded its recommendation on the shares from ‘buy’ to ‘hold’ and cut its target price from 570p to 520p.

A break in the clouds of political uncertainty might allow European airline carriers' shares to recover some of the year-to-date drop, UBS said.

Investors have been eyeing downside risks to the earnings of companies in the space due to fuel price increases and capacity additions.

However, political uncertainty had also been a factor in the EU airlines index's approximate 17% year-to-date drop, with a 7% decline having come in just the last 30 days.

"We also think that political uncertainty has added to concerns and this overhang will reduce in the coming weeks. Perhaps investors' will find a renewed appetite for the airline space," analyst Jarrod Castle said in a research note sent to clients.

The analyst said he continued to be positive on RyanAir, IAG and Lufthansa, sticking with 'buy' ratings on all three stocks

Goldman Sachs lowered its near and medium-term earnings forecasts and target price for department store-operator Debenhams.

Pointing to the likelihood of declines in the company’s like-for-like sales and pressure on gross margins as a result of foreign exchange headwinds in fiscal years 2017 and 2018, the broker said “Debenhams’ earnings growth outlook remains modest by European retail standards”.

Like-for-likes would fall as a result of the company’s clothing market online penetration rate, the broker said.

Those two factors led analysts Richard Edwards, Abhilash Mohapatra and Natasha de la Grense to the conclusion that the firm’s earnings per share would be flat from here.

In a research note sent to clients on Wednesday, but dated 22 June, the analysts revised their estimates for the company’s earnings per share in 2016 from 7.76p to 7.37p, for 2017 from 8.15p to 7.70p and for 2018 from 7.89 to 7.44.