Mercury Systems, Inc. (MRCY) | Investment Case

1. Company Snapshot

1.a. Company Description

Mercury Systems, Inc., a technology company, manufactures and sells components, products, modules, and subsystems for aerospace and defense industries in the United States, Europe, and the Asia Pacific.Its products and solutions are deployed in approximately 300 programs with 25 defense contractors and commercial aviation customers.The company offers components, including power amplifiers and limiters, switches, oscillators, filters, equalizers, digital and analog converters, chips, monolithic microwave integrated circuits, and memory and storage devices; modules and sub-assemblies, such as embedded processing modules and boards, switched fabric boards, digital receiver boards, multi-chip modules, integrated radio frequency and microwave multi-function assemblies, tuners, and transceivers, as well as graphics and video processing, and Ethernet and input-output boards; and integrated subsystems.

It also designs and develops digital radio frequency memory units for various modern electronic warfare applications; radar environment simulation and test systems for defense and intelligence applications; and signals intelligence payloads and EO/IR technologies for small UAV platforms, as well as onboard UAV processor systems for real-time wide area motion imagery.The company was formerly known as Mercury Computer Systems, Inc.and changed its name to Mercury Systems, Inc.

in November 2012.Mercury Systems, Inc.was incorporated in 1981 and is headquartered in Andover, Massachusetts.

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1.b. Last Insights on MRCY

Mercury Systems' recent performance was driven by strong Q3 earnings, meeting estimates and reflecting benefits of a broad program portfolio and solid backlog momentum. The company's fiscal Q3 results highlighted its ability to execute on its strategic growth initiatives, including the acquisition of Star Lab to advance its leadership position in secure processing. Additionally, the strategic supply agreement with Cicor Group will support European defense applications, further solidifying Mercury's position in the market.

1.c. Company Highlights

Last Price	70.58
Change Percentage	-1.08%
Open	71.75
Previous Close	71.35
Market Cap ( Millions)	4242
Volume	495752
Year High	85.33
Year Low	37.28
M A 50	74.98
M A 200	58.42

FCF Yield	3.20%
Dividend Yield	0.00%
ROE	-2.25%
Debt / Equity	43.74%
Net Debt / EBIDTA	498.49%
Price To Book	2.83
Price Earnings Ratio	-127.0
Price To FCF	31.29
Price To sales	4.55
EV / EBITDA	67.1

2. Mercury Systems' Q1 FY '26 Earnings: A Strong Start to the Year

Mercury Systems reported a robust first quarter, with revenue of $225 million, up 10.2% year-over-year, and adjusted EBITDA margin of 15.8%, up 530 basis points year-over-year. The company's earnings per share (EPS) came in at $0.26, significantly beating estimates of $0.08. The strong EPS performance was driven by the company's continued focus on operational excellence, with adjusted EBITDA of $35.6 million. The results demonstrate the company's ability to deliver on its priorities, including performance excellence, driving organic growth, expanding margins, and improving free cash flow.

Publication Date: Nov -19

                                    📋 Highlights
                                    Record Backlog & Bookings::
                                                Achieved $250M bookings (1.11 book-to-bill) and $1.4B record backlog, driving 10.2% YoY revenue growth to $225M.
EBITDA Margin Expansion::
                                                Adjusted EBITDA surged 66% YoY to $35.6M, with margins up 530 bps to 15.8%, reflecting operational efficiency.
Phoenix Capacity Expansion::
                                                Adding 50,000 sq ft of automated manufacturing space in Q3 FY26 to support Common Processing Architecture (CPA) production ramps.
Gross Margin Progress::
                                                260 bps YoY improvement in gross margin, targeting low-to-mid 20% range via automation, backlog margin optimization, and efficiency gains.
Free Cash Flow Momentum::
                                                $4.4M free cash outflow (improved by $16.5M YoY) and $135.6M generated over last 4 quarters, with 50% conversion target over time.

                                

Bookings and Backlog

The company's bookings of $250 million and a 1.11 book-to-bill resulted in a record backlog of $1.4 billion. This strong backlog provides visibility into future revenue growth, with the company expecting to bring online over 50,000 square feet of factory space in Q3 of FY '26 to support ramped production for its Common Processing Architecture programs. As David Farnsworth noted, "The Phoenix capacity gives us additional flexibility to flex up and scale up efficiently on other programs."

Margin Expansion and Cash Flow

Mercury Systems' gross margins are up 260 basis points year-over-year, and the company expects to reach its target profile of low to mid-20s through improvements in backlog margin, automation, and efficiency. The company's free cash flow conversion rate is expected to be at 50% over the long run. With a current EV/EBITDA ratio of 64.78, investors are pricing in significant growth expectations. The company's P/S Ratio of 4.38 also suggests that investors are expecting strong revenue growth, with analysts estimating next year's revenue growth at 7.9%.

Outlook and Valuation

The company's guidance for FY '26 remains unchanged, with expected annual revenue growth of low single digits. The first half of the year is expected to be relatively flat year-over-year, with volume increasing sequentially as the company moves through the second half. With a ROE of -2.25% and a Net Debt / EBITDA ratio of 4.98, the company's leverage is a concern. However, the recent amendment to its revolving credit facility, which extends the maturity date by 5 years, provides continued access to a strong source of liquidity.

3. NewsRoom

Creative Planning Acquires 5,669 Shares of Mercury Systems Inc $MRCY

Dec -02

Source: defenseworld.net

HALPER SADEH LLC ENCOURAGES LIVE NATION ENTERTAINMENT, INC. SHAREHOLDERS TO CONTACT THE FIRM TO DISCUSS THEIR RIGHTS

Nov -30

Source: prnewswire.com

Jana Partners Increases Stake in Rapid7 Inc.

Nov -26

Source: gurufocus.com

Why Are Insiders Are Dumping Shares of Robinhood, Stryker, and Mercury Systems?

Nov -25

Source: marketbeat.com

Connor Clark & Lunn Investment Management Ltd. Makes New $1.62 Million Investment in Mercury Systems Inc $MRCY

Nov -17

Source: defenseworld.net

Jana Partners Reduces Stake in Mercury Systems Inc.

Nov -15

Source: gurufocus.com

Jana Partners' Strategic Move: Significant Addition of The Cooper Companies Inc

Nov -14

Source: gurufocus.com

Mercury Systems: Defense Electronics Stock You Don't Want To Miss As Margins Expand

Nov -11

Source: seekingalpha.com

4. Business Breakdown

4.a. Revenues by Country

4.b. Revenues by Segment

5. Expected revenues mid-term growth (3.70%)

6. Segments

Integrated Subsystems

Expected Growth: 3.5%

Mercury Systems' Integrated Subsystems segment growth is driven by increasing demand for advanced defense electronics, rising adoption of artificial intelligence and machine learning in military applications, and growing need for secure and reliable computing solutions. Additionally, the company's strategic acquisitions and investments in research and development are contributing to its growth.

Modules and Sub-assemblies

Expected Growth: 3.8%

Mercury Systems' Modules and Sub-assemblies segment growth of 3.8% is driven by increasing demand for advanced defense electronics, rising adoption of artificial intelligence and machine learning in military applications, and growing need for secure and reliable computing solutions. Additionally, the company's strategic acquisitions and investments in research and development are expected to contribute to the segment's growth.

Components

Expected Growth: 4.2%

Mercury Systems, Inc.'s 4.2% growth is driven by increasing demand for advanced defense electronics, rising adoption of artificial intelligence and machine learning in military applications, and growing investments in electronic warfare and cyber security. Additionally, the company's strategic acquisitions and partnerships have expanded its product portfolio and enhanced its market position.

7. Detailed Products

Sensors and Switches

Mercury Systems offers a range of sensors and switches designed for military and aerospace applications, including temperature sensors, pressure sensors, and switch modules.

RF and Microwave Solutions

Mercury Systems provides RF and microwave solutions, including amplifiers, filters, and antennas, for military and aerospace applications.

Embedded Processing

Mercury Systems offers embedded processing solutions, including single-board computers, rugged servers, and GPU-accelerated computing solutions.

Mission Computing

Mercury Systems provides mission computing solutions, including ruggedized computers, storage systems, and networking solutions.

Security and Encryption

Mercury Systems offers security and encryption solutions, including cryptographic modules, secure boot mechanisms, and trusted platform modules.

Radar and Electronic Warfare Subsystems

Mercury Systems provides radar and electronic warfare subsystems, including radar antennas, receivers, and transmitters.

8. Mercury Systems, Inc.'s Porter Forces

Forces Ranking

Threat Of Substitutes

Mercury Systems, Inc. operates in a niche market with high barriers to entry, reducing the threat of substitutes.

Bargaining Power Of Customers

Mercury Systems, Inc. has a diverse customer base, reducing the bargaining power of individual customers.

Bargaining Power Of Suppliers

Mercury Systems, Inc. relies on a few key suppliers, giving them some bargaining power, but the company's size and reputation mitigate this risk.

Threat Of New Entrants

The high barriers to entry in the defense and aerospace industries, combined with Mercury Systems, Inc.'s established reputation, make it difficult for new entrants to compete.

Intensity Of Rivalry

The defense and aerospace industries are highly competitive, with many established players competing for contracts and market share.

9. SWOT Analysis

10. Capital Structure

10.a. Balance Sheet

10.b. Weighted Average Cost of capital

	Value
Debt Weight	29.12%
Debt Cost	7.32%
Equity Weight	70.88%
Equity Cost	7.32%
WACC	7.32%
Leverage	41.08%

11. Quality Control: Mercury Systems, Inc. passed 3 out of 9 key points

Strong Liquidity

Low Debt

Strong Interest Coverage

Healthy Cash Flow

Operating Inefficiency

Strong Return On Equity

Consistent Revenue Growth

Consistent Operating Cash Flow Growth

Margin Improvement

12.a Historical Valuation

12.b Price/Earnings Ratio

12.c Margin Valuation

12.d Peers Valuation

Peers Group Analysis

Mercury Systems

A-Score: 4.0/10

Value: 3.3

Growth: 3.7

Quality: 3.2

Yield: 0.0

Momentum: 10.0

Volatility: 3.7

1-Year Total Return ->

Intuitive Machines

A-Score: 3.9/10

Value: 8.0

Growth: 1.8

Quality: 4.4

Yield: 0.0

Momentum: 8.5

Volatility: 1.0

1-Year Total Return ->

Astronics

A-Score: 3.9/10

Value: 3.5

Growth: 4.0

Quality: 3.3

Yield: 0.0

Momentum: 9.5

Volatility: 3.0

1-Year Total Return ->

Sky Harbour

A-Score: 3.9/10

Value: 6.6

Growth: 3.6

Quality: 4.8

Yield: 0.0

Momentum: 4.0

Volatility: 4.3

1-Year Total Return ->

Terran Orbital

A-Score: 3.9/10

Value: 9.6

Growth: 3.2

Quality: 5.0

Yield: 0.0

Momentum: 5.0

Volatility: 0.3

1-Year Total Return ->

V2X

A-Score: 3.8/10

Value: 6.3

Growth: 4.0

Quality: 6.1

Yield: 0.0

Momentum: 2.0

Volatility: 4.7

1-Year Total Return ->

Peers Metrics

12.e Scoring ^Insights

12.f DCF ^BETA

Parameters

Short Term Growth

8.16%

Short term Time

10.0

Long-Term Growth

2.00%

WACC

7.32%

Mercury Systems, Inc. - US5893781089

1. Company Snapshot

1.a. Company Description

1.b. Last Insights on MRCY

1.c. Company Highlights

Weak Momentum

Lower Quality

Lower Growth

Earnings Miss

Revenues Miss

Cheaper

Earnings Beats

Revenues Beats

Average Growth

Stable Momentum

Average Yield

Average Quality

Strong Momentum

Fairly Valued

2. Mercury Systems' Q1 FY '26 Earnings: A Strong Start to the Year

Bookings and Backlog

Margin Expansion and Cash Flow

Outlook and Valuation

3. NewsRoom

4. Business Breakdown

4.a. Revenues by Country

4.b. Revenues by Segment

5. Expected revenues mid-term growth (3.70%)

6. Segments

Integrated Subsystems

Expected Growth: 3.5%

Modules and Sub-assemblies

Expected Growth: 3.8%

Components

Expected Growth: 4.2%

7. Detailed Products

Sensors and Switches

RF and Microwave Solutions

Embedded Processing

Mission Computing

Security and Encryption

Radar and Electronic Warfare Subsystems

8. Mercury Systems, Inc.'s Porter Forces

Forces Ranking

Threat Of Substitutes

Bargaining Power Of Customers

Bargaining Power Of Suppliers

Threat Of New Entrants

Intensity Of Rivalry

9. SWOT Analysis

Strength

Weaknesses

Opportunities

Threats

10. Capital Structure

10.a. Balance Sheet

10.b. Weighted Average Cost of capital

11. Quality Control: Mercury Systems, Inc. passed 3 out of 9 key points

12.a Historical Valuation

12.b Price/Earnings Ratio

12.c Margin Valuation

12.d Peers Valuation

Peers Group Analysis

Peers Metrics

12.e Scoring Insights

12.f DCF BETA

Parameters

Short Term Growth

Short term Time

Long-Term Growth

WACC

Target Price

70.58$

Current Price

70.58$

Potential

-0.00%

Expected Cash-Flows

12.e Scoring ^Insights

12.f DCF ^BETA