Mercury Systems (MRCY) Up 5.3% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for Mercury Systems (MRCY). Shares have added about 5.3% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Mercury Systems due for a pullback? 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 drivers.

Mercury Beats on Q2 Earnings & Revenues, Raises View

Mercury Systems reported second-quarter fiscal 2020 (ended Dec 27, 2019) results, wherein both top and bottom lines outpaced the Zacks Consensus Estimate.

Non-GAAP earnings per share of 54 cents grew 14.9% year over year and beat the Zacks Consensus Estimate by 12.5%.

Revenues came in at $194 million, marking a year-over-year jump of 22%. The metric also surpassed the Zacks Consensus Estimate of $193 million.

Robust organic growth, including the expansion of the microelectronics business, drove the company’s performance.

Strong demand for product s resulted in significant deal wins, which drove the top line.

Quarterly Details

Organic revenues (91.5% of total revenues) grew 12% to $177.6 million in the quarter.  

The company reported Acquired revenues (8.5%) of $16.3 million, 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 andaccounted for 57% of total revenues.

Revenues from Command, Control, Communications, Computers and Intelligence (C4I) represented 30% of total revenues and grew22% 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 21% year over year to $210 million, resulting in a 1.08 book-to-bill ratio.Key bookings included products like ALR-56, LTAMDS, ProVision and Paragon MODS.

The company ended the quarter with a backlog of $728 million, up 39% year over year. Within the next 12 months, $522 million worth products of this total backlog of orders areexpected to be shipped.

The company’s largest revenue programs were P-8, F-35, Filthy Badger, F-16 SABR and the next-generation missile system.

Margins

Gross margin for the fiscal first quarter expanded 100 basis points (bps) to 45.6%.

Adjusted EBITDA grew 16% year over year to $42.8 million. However, adjusted EBITDA margin contracted 130 bps year over year to 22%.

Balance Sheet and Cash Flow

Mercury exited the quarter with cash and cash equivalents of $182 million, up from $161.3 million at the end of the previous quarter.

The company generated $32.1 million of cash flow from operatingactivities compared with $24.3 million in the prior quarter.

Free cash flow was $20.7 million, up from $14.7 million sequentially.

Guidance

For the third quarter of fiscal 2020, revenues are expectedin the range of $190-$200 million.

Adjusted EBITDA for the quarter is anticipated in aband of $42-$44 million. Adjusted earnings are projected to be50-53 cents per share.

Continued expansion in capexis 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 $780-$795 million, increasingfrom the earlier guidance of $775-$790 million and implying 19-21% growth from the prior-year quarter’s reported number. The company expects organic revenue growth between 13% and 14%, up from the previously expected 11 for the current fiscal year.

Adjusted EBITDA for the fiscal is expected to be$172.5-$176 million, up from the earlier expectation of $160.5-$168.5 million.

Adjusted earnings for the fiscal are now estimated to be $2.09-$2.13 per share, increasing from $2.03-$2.11guided earlier and suggesting an improvement of 14-16% from the year-earlier reported figure.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates review.

VGM Scores

At this time, Mercury Systems has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% 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 #2 (Buy). We expect an above average return from the stock in the next few months.

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