A month has gone by since the last earnings report for Mercury Systems (MRCY - Free Report) . Shares have lost about 1.6% 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 catalysts.
Mercury Q4 Earnings Beat, Organic Revenues Aid Growth
Mercury Systems reported fourth-quarter fiscal 2020 non-GAAP earnings of 72 cents per share that beat the Zacks Consensus Estimate by 24.1%. The figure jumped 50% year over year.
Revenues of $217.4 million also surpassed the consensus mark by 1.6% and grew 22.8% year over year driven by robust organic growth.
The company generated most its revenues from SEWIP, Filthy Buzzard, F-35, F-16 SABR, and a classified radar program.
Organic revenues (94.5% of total revenues) grew 17.5% to $205.5 million in the reported quarter.
Moreover, acquired revenues (5.5% of total revenues) of $11.9 million soared from $2.1 million reported in the year-ago quarter, primarily attributable to the buyouts of The Athena Group, Syntonic Microwave and American Panel Corporation.
Mercury's total bookings increased 15% year over year to $278.6 million, resulting in a 1.28 book-to-bill ratio. The company’s largest bookings in the reported quarter were F-35, SEWIP, LTAMDS, a classified radar program, and Filthy Buzzard.
The company ended the quarter with a backlog of $831.1 million, up $205.7 million year over year. Within the next 12 months, $567.7 million worth of products from this backlog of orders are expected to be shipped.
Gross margin in the fiscal fourth quarter contracted 70 basis points (bps) year over year to 44.4%.
Adjusted EBITDA grew 30.8% year over year to $49.6 million. Also, adjusted EBITDA margin expanded 140 bps year over year to 22.8%.
Selling, general & administrative expenses as a percentage of revenues decreased 100 bps year over year to 15.4%.
However, research & development expenses as a percentage of revenues increased 90 bps to 12.4%.
Operating margin expanded 40 bps year over year to 12.2%.
Balance Sheet and Cash Flow
Mercury had cash and cash equivalents of $226.8 million as of Jul 3, 2020, up from $407.1 million at the end of the previous quarter.
The company generated $28.7 million of cash flow from operating activities compared with $30.1 million in the previous quarter and $26 million in the year-ago quarter.
Free cash flow was $17.2 million, down from $19.2 million sequentially but slightly up on a year-over year basis.
Key Q4 Developments
In April, Mercury received a $4.7 million order from a leading defense prime contractor to provide artificial intelligence-processing technology for integration into an advanced airborne electro-optic system. The order was booked in the company’s fiscal 2020 third quarter and is expected to be shipped over the next several quarters.
Moreover, it received a $30 million multi-year award from a leading defense prime contractor to provide video-display technology for integration into mobile ground vehicles. The award has a 36-month planned performance and shipment period.
Further, Mercury announced the SpectrumSeries RFM3103s ultra-wideband dual upconverter, which is designed to align with the emerging sensor open systems architecture’s technical standard for electronic-warfare environments.
In June, Mercury announced the new GSC6204 OpenVPX which is NVIDIA’s Turing architecture-based GPU co-processing engine. The solution provides accelerated high-performance computing capabilitiesto commercial aerospace and defense applications.
Moreover, the company received a $49 million order from a leading defense prime contractor for high-performance signal processing and radio-frequency solutions for a missile-defense program. The order was booked in Mercury’s fiscal 2020 fourth quarter and is expected to be shipped over the next several quarters.
The company also received a $3.9 million multi-phase contract award from a leading defense prime contractor for the development of a high-density system-in-package solution for radar systems utilizing its novel 2.5D chip-scale integration technology.
Further, it received a $25 million follow-on order from a leading defense prime contractor for integrated radio frequency and digital subsystems for an advanced naval electronic-support application. The order was booked in Mercury’s fiscal 2020 fourth quarter and is expected to be shipped over the next several quarters.
Mercury also announced volume production of its newest, high-density secure memory device, with the highest capacity in the smallest form factor available.
For the first quarter of fiscal 2021, revenues are expected to be $190-$205 million.
Adjusted EBITDA is anticipated in a band of $38-$41 million. Adjusted earnings are projected to be 43-47 cents per share.
The company expects CapEx in the first quarter of fiscal 2021 to be roughly 7% of revenues.
Mercury expects fiscal 2021 revenues of $860-$885 million. Top-line growth is expected to be driven by high single-digit organic-revenue growth.
Adjusted EBITDA is expected to be $188-$196 million. Adjusted earnings are estimated to be $2.15-$2.26 per share.
How Have Estimates Been Moving Since Then?
It turns out, estimates review have trended downward during the past month. The consensus estimate has shifted 38.16% due to these changes.
At this time, Mercury Systems has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. However, the stock was allocated a grade of F on the value side, putting it in the fifth quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Mercury Systems has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.