Ricardo shares down as Stifel cuts earnings forecasts, cites weak performance

Investing.com -- Shares of Ricardo (LON:RCDO) have continued their downward trend following a disappointing trading update, with analysts at Stifel cutting their earnings forecasts and lowering their price target to 280p from 600p, sending shares down over 4% on Monday. 

The downgrade comes as the company faces weaker-than-expected performance across key divisions and rising debt levels, which have dampened investor sentiment.

Ricardo’s recent half-year trading update revealed that full-year results for 2025 are expected to fall below consensus estimates. 

The update follows the company’s recent divestment of its Defense division—previously a major profit contributor—and its acquisition of E3 Advisory. 

The timing of these moves, coupled with immediate signs of financial strain, has raised concerns about the company’s strategic direction.

The biggest disappointment stems from Ricardo’s Energy and Environment division, which had been seen as the company’s strongest asset. 

Despite its high operating margins of around 17%, the unit’s profit is expected to remain flat for the year, excluding the impact of E3 Advisory. 

Analysts point to delays in government spending due to global elections and uncertainties surrounding the UK water industry’s investment cycle. 

Stifel analysts warn that rising government debt and a potential shift away from green energy initiatives could further impact future growth.

Other business areas also showed signs of weakness. The Automotive & Industrial segment is expected to generate only £3 million in profit for fiscal 2025, below the second-half 2024 level of £5 million. 

Stifel analysts argue that central costs remain disproportionately high, accounting for 45% of operating profit before central costs, and require urgent restructuring.

As a result, Stifel has slashed its adjusted operating profit forecasts for fiscal 2025 and 2026 by 23% and 28%, respectively. 

Adjusted earnings per share projections have been cut even more sharply, down 37% for 2025 and 39% for 2026. 

Meanwhile, net debt is expected to rise to over £80 million in fiscal 2026, pushing Ricardo’s leverage to 2.35 times pre-lease earnings—far above the company’s target of 1.25 times, although still below the 3x covenant.

The deteriorating financial outlook leaves Ricardo with limited strategic options. Stifel analysts suggest that while the EE business alone could attract interest from potential buyers, the company’s broader portfolio is unlikely to appeal to a single acquirer. 

With leverage concerns rising, Ricardo may need to explore divestments, but significant capital investment commitments—particularly in the marine propulsion segment—make this difficult in the near term.

Following these developments, Ricardo’s shares have tumbled year-to-date and are now trading at around seven times estimated 2026 earnings before interest, tax, depreciation, and amortization. 

While this valuation aligns with the company’s historical average, Stifel sees little room for upside given the weak earnings outlook and investor skepticism. 

The brokerage has downgraded Ricardo to a “hold” rating, signaling that the path to recovery will be long and uncertain.