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Why Is Mercury Systems (MRCY) Down 9% Since Last Earnings Report?

·4-min read

A month has gone by since the last earnings report for Mercury Systems (MRCY). Shares have lost about 9% 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 its most recent earnings report in order to get a better handle on the important drivers.

Mercury Systems' Q1 Earnings & Revenues Top Estimates

Mercury Systems reported solid first-quarter fiscal 2022 results, wherein both earnings and revenues not only outpaced the respective Zacks Consensus Estimate but also improved year over year.

The aerospace and defense tech company reported non-GAAP earnings of 41 cents per share, which beat the Zacks Consensus Estimate of 39 cents per share. However, the bottom line declined 23.5% from 51 cents per share in the year-ago quarter.

Mercury Systems’ non-GAAP revenues increased 9% year over year to $225 million surpassing the Zacks Consensus Estimate of $212.5 million. The company’s acquired businesses — Physical Optics Corporation and Pentek — cumulatively contributed $41.3 million to the first-quarter revenues.

During the quarter, the company announced the buyout of global avionics maker, Avalex Technologies, and accelerated 1MPACT value creation initiative launched in the fourth quarter of fiscal 2021 to realign its organizational structure.

Quarterly Details

Organic revenues accounted for 81.7% of total revenues, which decreased by 10.6% to $183.7 million in the reported quarter.

Acquired revenues, representing 18.3% of total revenues, were $41.3 million in the quarter under review.

Mercury Systems’ total bookings were $199.3 million, resulting in a 0.89 book-to-bill ratio. The company’s largest bookings in the reported quarter were a classified C2 program, a classified EW program, F-18, F-16 and F-35.

The company ended the quarter with a backlog of $883.9 million, up $57.8 million on a year-over-year basis. Within the next 12 months, products worth $553.9 million from this order backlog are expected to be shipped.

Operating Details

Mercury Systems’ gross profit was $88.4 million, up by 0.3% year over year. However, its gross margin contracted 360 basis points (bps) to 39.3%.

Adjusted EBITDA slumped 10.4% year over year to $38.3 million.

Selling, general & administrative expenses as a percentage of revenues expanded 40 bps to 16.4%. Research & development expenses as a percentage of revenues contracted 50 bps to 12.8%.

Balance Sheet & Other Details

As of Oct 1, 2021, Mercury Systems’ cash and cash equivalents were $95.8 million compared with $239.1 million on Jul 3, 2020. Long-term debt was $200 million at the end of first-quarter.

The company used $2 million worth cash for operational activities during the first quarter of fiscal 2022. Free cash flow was negative $7.4 million.

The company’s largest revenue programs for the quarter were a classified radar program, a classified C2 program, MH-60, F-35 and P8.

Guidance

For the second quarter of fiscal 2022, the company projects revenues between $215 million and $225 million.

Adjusted EBITDA is anticipated between $38 million and $41 million. Adjusted earnings are projected to be 39-43 cents per share.

Mercury Systems expects fiscal 2022 revenues of $1-1.03 billion.

Adjusted EBITDA is expected to be $220-$227 million for the full fiscal 2022.

Adjusted earnings for fiscal 2022 are estimated to be $2.51-$2.60 per share.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -30.23% due to these changes.

VGM Scores

Currently, Mercury Systems has a subpar Growth Score of D, however its Momentum Score is doing a lot better with a B. Charting a somewhat similar path, 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 D. 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 these revisions indicates a downward shift. Notably, Mercury Systems has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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