United Kingdom

MIDAS SHARE TIPS: Ricardo is helping turn the US army green

Think of the US army in action and chances are a khaki-coloured Hummer truck will come to mind. 

The High Mobility Multipurpose Wheeled Vehicle, to give the souped-up truck its proper name, is one of the most widely recognised in the world and the US army has about 150,000 of them.

But Hummers can roll over, killing and injuring soldiers on the battlefield and at home. Now the British engineering group Ricardo is helping the US defence department to make its Hummers safer by installing devices that keep the trucks stable. 

Stable profits:  Ricardo makes devices that prevent the US army’s Hummers from rolling over

Already, 5,000 new vehicles have been given Ricardo’s kit and the firm was last month awarded a $90million (£65million) contract to fit the technology in almost 10,000 older Hummers, too.

The deal is a timely reminder of Ricardo’s origins more than 100 years ago. At the outbreak of the First World War, the UK’s War Office was looking for ways to lessen the smoke produced by tanks on the field, giving away their position. 

It approached engineering prodigy Harry Ricardo with the problem. He created an engine that was both cleaner and more powerful, and Ricardo was born.

Ricardo has won plaudits for its engineering expertise ever since, working with big car makers around the world, as well as the manufacturers of vehicles ranging from diggers to lorries to motorbikes. The group also makes customised motors for McLaren, Bugatti and other top-of-the-range sports cars.

The Indian army is a customer, too, using Ricardo to upgrade tank engines to make them more robust.

But Ricardo is changing. Whereas once, revenues came entirely from old-school engineering work, today Ricardo makes three-quarters of its money from helping governments and companies to prepare for a low-carbon future. The shares are £4.35 and should increase considerably this year and beyond.

The company is responsible for Britain’s greenhouse gas inventory – an annual report that records emissions and charts progress towards net zero. 

Reducing carbon footprint: Ricardo's clients include NHS Scotland, Water UK and Her Majesty’s Prisons, all of which need help with reducing the amount of energy they use

Ricardo does not just compile this data, stretching from transport to industry to woodburning stoves. It also advises the Government on how to drive down emissions in the years ahead.

Other customers include NHS Scotland, Water UK and Her Majesty’s Prisons, all of which need help with reducing the amount of energy they use.

Ricardo is in demand overseas as well. The UK is considered a leader in the decarbonisation field, so Ricardo’s work with the Government has led to contracts as far afield as sub-Saharan Africa, Bangladesh and Argentina.

Now the US army is using Ricardo to try to reduce its carbon footprint. One of the world’s biggest users of fossil fuels, US chiefs are looking to Ricardo for advice on how to make its fleet greener.

Elsewhere, Ricardo advises car makers and other vehicle manufacturers on how best to reduce emissions. Train operators are important customers, too, both here and abroad, as the rail industry tries to become more ecological.

Ricardo advises car makers and other vehicle manufacturers on how best to reduce emissions

Even with all this expertise and such prestigious clients, Ricardo did not escape unscathed from the Covid-19 pandemic.

Car makers account for about 30 per cent of its sales and the industry went into virtual hibernation last year.

The group cancelled its final dividend for the year to June 2020, as sales fell and profits tumbled.

Interim figures for the six months to December provided evidence of recovery, however, and chief executive Dave Shemmans reinstated the dividend, albeit paying out just 1.75p, compared with 6.24p the previous year.

Brokers are confident that Ricardo will continue to bounce back with gusto as the pandemic recedes.

And dividends are likely to show a steady improvement, with 6p forecast for the year to June 2021, rising to 10p for the year to June 2022.

Shemmans himself is stepping down this year, having joined the business in 1999 and spent the past 16 years running it.

He started Ricardo’s move into the environmental area. Whoever succeeds him is bound to continue in the same vein.

Midas verdict: At the beginning of last year, Ricardo shares were almost £8. Today, they are £4.35. The slump does not reflect this company’s prospects. In the short term, Ricardo stands to gain from a recovery in car sales. In the long term, the business is neatly positioned to benefit as countries and companies work out how best to reduce their carbon footprint. Buy.

Traded on: Main market Ticker: RCDO Contact: ricardo.com or 01273 455611 

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