What a fantastic six months it’s been for Mercury Systems. Shares of the company have skyrocketed 61.1%, hitting $80.11. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now the time to buy Mercury Systems, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free for active Edge members.
Why Do We Think Mercury Systems Will Underperform?
We’re glad investors have benefited from the price increase, but we don't have much confidence in Mercury Systems. Here are three reasons there are better opportunities than MRCY and a stock we'd rather own.
1. Core Business Falling Behind as Demand Declines
Investors interested in Defense Contractors companies should track organic revenue in addition to reported revenue. This metric gives visibility into Mercury Systems’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.
Over the last two years, Mercury Systems’s organic revenue averaged 2.5% year-on-year declines. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests Mercury Systems might have to lean into acquisitions to grow, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus). 
2. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for Mercury Systems, its EPS declined by 22.5% annually over the last five years while its revenue grew by 2.7%. This tells us the company became less profitable on a per-share basis as it expanded.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Mercury Systems’s ROIC has unfortunately decreased. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
Mercury Systems doesn’t pass our quality test. Following the recent rally, the stock trades at 80.6× forward P/E (or $80.11 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better stocks to buy right now. Let us point you toward the most entrenched endpoint security platform on the market.
Stocks We Like More Than Mercury Systems
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