Hitch a ride on Ricardo

Making transmissions for Bugatti and gears for Formula 1 cars takes a certain level of technical expertise. It's a niche market that Ricardo thrives in. In December, Ricardo announced a new multi-year engine supply agreement with McLaren. The contract is the largest ever in Ricardo's history and will generate revenue of around £40m a year from 2016. That is almost a fifth of the company's total revenue last year.

Demand for Ricardo's engineering expertise is well underpinned by structural trends in the automotive industry, specifically, the need to reduce carbon dioxide emissions and other pollutants and improve energy efficiency. Ricardo has been able to apply its skills across multiple markets including passenger cars, motorsport, rail and marine so as to reduce its reliance on any one particular segment.

A trading update last month said that the company exited its latest fiscal year to the end of June with a record order book. The McLaren contract is obviously the standout but orders are also flowing in from Ricardo's less flashy end markets. Recent wins include an engine project for a major US car maker, a US defence ground vehicle and a commercial vehicle engine programme. And prospects look good heading into the current fiscal year. Ricardo said its order pipeline is strong, particularly in Asia, with further opportunities in the final stages of negotiation.

All of which suggests that previously sluggish order intake - the order book dropped in the second half of last year - is turning a corner. There are still some softer spots. The recent trading update referenced continued challenging market conditions in Germany. But buoyant Asian and UK demand and improving trends in the US should keep the momentum going.

That growing order book bodes well for earnings. Investec expects Ricardo to report earnings per share growth of 8 per cent at the full-year results in September and to grow earnings by a further 8 per cent next year. The company's cash performance should also be solid. Ricardo's recent trading update said that its cash generation had been a touch ahead of expectations. Investec is now forecasting Ricardo's net cash pile to have hit £12.1m at the end of June, almost double where it was a year earlier.