Why Is Mercury Systems (MRCY) Down 4.8% Since Last Earnings Report?

A month has gone by since the last earnings report for Mercury Systems (MRCY). Shares have lost about 4.8% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Mercury Systems due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Mercury Beats on Q3 Earnings & Revenues

Mercury Systems reported third-quarter fiscal 2020 (ended Mar 27, 2020) results, wherein both top and bottom lines outpaced the Zacks Consensus Estimate.

Non-GAAP earnings per share of 60 cents grew 22.4% year over year and beat the Zacks Consensus Estimate by 15.4%.

Revenues came in at $208 million, marking a year-over-year increase of 19%. The metric also surpassed the Zacks Consensus Estimate of $199 million.

Robust organic growth drove the company’s performance.

Strong demand for weapon systems, space, avionics processing and mission computing, and secure rugged servers resulted in significant deal wins, which drove the top line.

Notably, the company was not materially impacted by the coronavirus-led economic disruptions.

Quarterly Details

Organic revenues (92% of total revenues) grew 11% to $191.5 million in the quarter.  

The company reported Acquired revenues (8%) of $16.5 million, which increased massively from $2.5 million reported in the prior-year quarter, attributable to the buyouts of GECO Avionics, The Athena Group, Syntonic Microwave and American Panel Corporation.

Sensor and Effector Mission Systems revenues rose 24% year over year and accounted for 57% of total revenues.

Revenues from Command, Control, Communications, Computers and Intelligence (C4I) represented 30% of total revenues and grew 22% year over year.

Modernization in radar, Electronic Warfare and C4I was high, providing the company with new opportunities in weapon systems, space, avionics processing, and mission computing and embedded rugged service.

Mercury's total bookings increased 32% year over year to $250 million, resulting in a 1.2 book-to-bill ratio.

The company ended the quarter with a backlog of $769.8 million, up 38% year over year. Within the next 12 months, $544.8 million worth of products from this backlog of orders are expected to be shipped.

Margins

Gross margin for the fiscal first quarter expanded 260 basis points (bps) to 44.9%.

Adjusted EBITDA grew 21% year over year to $47.1 million. Also, adjusted EBITDA margin expanded 40 bps year over year to 22.6%.

Balance Sheet and Cash Flow

Mercury exited the quarter with cash and cash equivalents of $407.1 million, up from $182 million at the end of the previous quarter.

The company generated $30.1 million of cash flow from operating activities compared with $32.1 million in the prior quarter.

Free cash flow was $19.2 million, down from $20.7 million sequentially.

Guidance

For the fourth quarter of fiscal 2020, revenues are expected to be $205.8-$215.8 million.

Adjusted EBITDA for the quarter is anticipated in a band of $46.4-$49.4 million. Adjusted earnings are projected to be 54-58 cents per share.

Continued expansion in capex is expected in the fiscal third quarter owing to continued investments in business expansion, including a $15-million investment to expand its trusted microelectronics business in Phoenix.

Mercury raised guidance for fiscal 2020. The company now expects revenues of $785-$795 million, up from the earlier guidance of $785-$790 million.

Adjusted EBITDA for the fiscal is expected to be $173-$176 million, up from the earlier expectation of $172.5-$176 million.

Adjusted earnings for the fiscal are now estimated to be $2.12-$2.16 per share, increasing from $2.09-$2.13 guided earlier.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month. The consensus estimate has shifted -6.93% due to these changes.

VGM Scores

Currently, Mercury Systems has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision has been net zero. Notably, Mercury Systems has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.

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