“Mercury
Takes Off Following First Quarter Earnings Release”
By: Nick
Dykema, AIM Student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary
Mercury Systems, Inc. (NYSE: MRCY) provides prime contractors with
secure processing subsystems to be used in the Department of Defense’s (DoD) critical
defense and intelligence programs. Over half of MRCY’s revenues are derived
from three prime defense contractors: Lockheed Martin (23%), Northrop Grumman
(8%), and Raytheon (20%).
• MRCY’s stock price soared
following the release of Q1 FY17 earnings that were highlighted by increased
bookings and smooth integration of Microsemi’s Carve-Out business.
• Management has adjusted Q2 FY17
guidance to reflect a stronger second-half of the year compared to the
first-half.
• The company increased FY17
guidance for revenue, GAAP income, and adjusted EBITDA.
• Mercury received a silver award
for its Ensemble® LDS6526 server blade.
Key
points:
Mercury’s acquired and organic
businesses experienced better than anticipated success during Q1 FY17. There
were many positives to the Company’s first quarter performance, which was
highlighted by many of its performance metrics coming in at the high end of
guidance.
Mercury’s October revenues increased 50% YoY (8% organic growth), and
management expects FY17 to post “solid” organic revenue growth as a whole. Compared
to the same quarter of the previous year, GAAP income increased by 34% while
adjusted EBITDA increased by 54%. Defense initiatives and programs, such Aegis,
F-35, and Digital Electronic Warfare System, were the reason for Mercury’s boost
in revenues.
Signs of the DoD’s plan to export
more defense technology are surfacing within Mercury. The company has already
booked Patriot foreign military sales to Japan, which is only the beginning of
increased foreign sales. In addition, MRCY’s total bookings grew 41% during the
quarter. Management expects sales to Lockheed Martin and Northrop Grumman to
increase, because the two prime contractors have received production contracts
for additional Surface Electronic Warfare Improvement Programs (SEWIP). The
significant increase in bookings reaffirms the company’s expansion plans.
Mercury Systems has done an
excellent job of integrating the acquired Carve-Out business from Microsemi.
All of the Carve-Out business’ infrastructure and security has become
integrated into Mercury’s existing platform, and MRCY is beginning to see the
cost synergies, purchasing synergies, and improvements in manufacturing
efficiencies materialize. Likewise, the company has discovered additional
growth opportunities following the integration of Microsemi. Looking into the
future, Mercury’s management reiterated their plans to pursue future
acquisitions that can further develop their most important products (Radio
Frequency and secure processing subsystems).
After looking at the company’s Q1
FY17 earnings call, specific financial results jump out. Adjusted earnings per
share increased to $0.22 (high end of management’s guidance) from Q1 FY16’s
adjusted earnings of $0.19. The company acknowledged capital expenditures will
be far greater as MRCY begins construction of its new headquarters.
Since
acquisition integration will accelerate in the second-half of the year,
management has revised their revenue and adjusted EBITDA guidance. In Q2, Mercury
is forecasting revenue to be between $91 million and $95 million, adjusted
EBITDA between $18 million and $21 million, and gross margin between 46% and
47%.
Additionally, second quarter GAAP income is expected to be in the range of
$2.7 million and $4.5 million, which would equate to earnings between $0.07 and
$0.11 per share. The company has slightly increased their FY17 revenue
guidance, which is now in the range of $370 million and $380 million. In
addition, GAAP income is expected to be between $19.8 million and $22.4
million, while adjusted EBITDA will be in the range of $83 million to $87
million.
It should be noted Mercury
Systems’ Ensemble® LDS6526 server blade was presented a silver
award at the Military and Aerospace Electronics 2016 Innovators Awards Program.
According to a press release on MRCY’s Investor Relations page, “This program
recognizes the most innovative solutions in military and aerospace technology
products and systems, as judged by a panel of senior third-party expert
professionals.” The award further exemplifies Mercury’s commitment to research
and development and pursuit of cutting edge technology within the defense
industry.
What
has the stock done lately?
Since being added to the AIM
Equity Fund in mid-October 2016 at a price of $23.57, MRCY’s stock price has
increased 27.9%. The company’s stock price has been climbing since the release
of its Q1 FY17 earnings call. Even after the stock price’s initial earnings
kick, Mercury has increased its value by 10.5% in November.
Most of November’s
success can be attributed to the outcome of the United States presidential
election. It is believed president-elect Donald Trump will increase defense
spending, which explains MRCY’s 18% jump in the week following his election.
Past
Year Performance:
Over the last year, Mercury’s
stock price has increased by 53.3%. Even though the stock has shown to be quite
volatile following management’s release of earnings, the stock price has exhibited
strong positive growth over the last year. Mercury’s 52 week high was $32.49,
while its low was $15.67. Currently, the company’s stock price is trading near
its highest level of the past year.
Source: FactSet
My
Takeaway
I believe Mercury Systems is destined
for success in the coming years. The company has had a few minor setbacks
during the last three years, but has been able to increase its stock price by
334% since February 2013. Recently, MRCY does not seem to be showing signs of
slowing down.
The company continues to increase sales and dominate the secure
processing subsystems segment of the defense technology industry. Due to a
positive outlook for defense spending, Mercury is well-positioned to increase
their future bookings and provide prime contractors and the Department of
Defense with technology for their future defense and intelligence programs.
