Mercury Systems Stock Poised to Rise on Aviation Industry Tailwinds

Mercury Systems Stock Poised to Rise on Aviation Industry Tailwinds

MRCY Stock’s Price Weakness Presents a Contrarian Opportunity

The selling capitulation in the stock market in 2022 was focused on technology and growth stocks, but the negative investor sentiment led to collateral damage in the majority of other sectors.

Many aviation-related stocks that were sold off from 2020 to 2022 have begun to show improved fundamentals. This shift should help shareholders of Mercury Systems Inc (NASDAQ:MRCY), a developer of hardware and software for the commercial aviation and defense segments.

Just think about the current strong rally by global commercial aviation companies as the travel industry rebounds and airlines are again ordering jets. Moreover, the war in Ukraine and the continued military buildup globally have driven up the defense spending by many countries.

These are bullish tailwinds for Mercury Systems Inc, which has been struggling over the past year.

Advertisement

Mercury Systems stock is down by 33% from its 52-week high and down by 50% from its record high of $96.29, which was set in April 2020. I currently view MRCY stock as a contrarian opportunity as the aviation sector improves.

Chart courtesy of StockCharts.com

Mercury Systems Inc on Pace to Hit $1 Billion in Revenue

Mercury Systems ramped up its revenues in its past four fiscal years (which end in June). The company’s revenue growth has been driven by a series of strategic acquisitions.

Mercury Systems Inc increased its revenues by 100% from fiscal 2018 to a record level in fiscal 2022. The company had four straight years of double-digit-percent revenue growth prior to experiencing some slowing in fiscal 2022. That slowing led investors to sell off shares of Mercury Systems stock.

There are clearly some concerns with the decline in the company’s acquisition-driven revenue growth rate. Mercury Systems Inc now needs to focus on its organic revenue growth.

Analysts estimate that the company’s revenue growth rate will lower to 4.1% (for $1.0 billion in revenues) in fiscal 2023 and improve to 7.8% (for $1.1 billion in revenues) in fiscal 2024. (Source: “Mercury Systems, Inc. (MRCY),” Yahoo! Finance, last accessed January 20, 2023.)

This implies that Mercury Systems Inc trades at a forward multiple of 2.5 times its consensus 2024 revenue estimate. This is reasonable, given the current market.

Fiscal YearRevenues (Millions)Growth
2018$493.2N/A
2019$654.732.8%
2020$796.621.7%
2021$924.016.0%
2022$988.27.0%

(Source: “Mercury Systems Inc.” MarketWatch, last accessed January 20, 2023.)

MRCY stock has consistently delivered positive earnings before interest, taxes, depreciation, and amortization (EBITDA), but its EBITDA declined in fiscal 2022.

Fiscal YearEBITDA (Millions)Growth
2018$113.8N/A
2019$125.09.9%
2020$147.518.0%
2021$173.217.5%
2022$164.6-5.0%

(Source: Ibid.)

On the bottom line, Mercury Systems stock has generated positive generally accepted accounting principles (GAAP) diluted earnings per share (EPS), but its GAAP diluted EPS have gone down in the past two fiscal years, which is something the company will need to address.

After adjusting for non-recurring expenses, Mercury Systems Inc reported profits of $2.19 per diluted share for fiscal 2022. Analysts expect this to decline to $2.02 in fiscal 2023 but rally to $2.46 in fiscal 2024. (Source: Yahoo! Finance, op. cit.)

Mercury Systems Inc’s forward 2023 EPS multiple of 20.3 times is reasonable at its current share price, and it should expand when the company’s financial situation improves. The company has only beaten the consensus EPS estimate in one of the last four quarters, so there’s room for improvement.

Fiscal YearGAAP Diluted EPSGrowth
2018$0.86N/A
2019$0.9612.1%
2020$1.5661.3%
2021$1.12-28.1%
2022$0.20-82.0%

(Source: Ibid.)

Mercury Systems Inc produced positive free cash flow (FCF) before turning negative in fiscal 2022. That was largely due to a significant decline in its earnings. Once the company can resolve its earnings pressure, I expect its FCF to move back to being positive.

Fiscal YearFCF (Millions)Growth
2018$0.86N/A
2019$0.9612.1%
2020$1.5661.3%
2021$1.12-28.1%
2022-$46.5-190.1%

(Source: MarketWatch, op. cit.)

Analyst Take

Mercury Systems stock has been retaining strong institutional ownership, with 332 institutional investors holding the majority of the outstanding shares. (Source: Yahoo! Finance, op. cit.)

At this point, following its share-price deterioration, Mercury Systems Inc will need to improve its operating results in order to drive back buying of MRCY stock.