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Why Is Mercury Systems (MRCY) Up 14% Since Last Earnings Report?

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A month has gone by since the last earnings report for Mercury Systems (MRCY - Free Report) . Shares have added about 14% 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 Q3 Earnings & Revenues Top Estimates, Up Y/Y

Mercury Systems reported third-quarter fiscal 2021 non-GAAP earnings of 64 cents per share, beating the Zacks Consensus Estimate by a penny. The figure also marks improvement from the year-ago quarter’s earnings of 60 cents per share.

Revenues of $256.9 million also surpassed the consensus mark of $254.2 million as well as increased 23.5% year over year. This year-on-year improvement is mainly attributable to the Physical Optics Corporation acquisition which contributed $38.5 million to the total revenues.

Quarterly Details

Organic revenues (85% of total revenues) climbed 5% to $218.4 million in the reported quarter.

Moreover, acquired revenues (15% of total revenues) came in at $38.5 million.

Mercury's total bookings at the end of the fiscal third quarter came in at $210.2 million, reflecting a book-to-bill ratio of 0.82. The company ended the quarter with a backlog of $893.7 million, up $123.9 million year on year. From this backlog, $545.5 million worth of products are expected to be shipped within the next 12 months.

Operating Details

Gross margin shrunk 380 basis points (bps) year on year to 41.1% in the fiscal third quarter.

Adjusted EBITDA climbed 16.3% year over year to $54.8 million. However, adjusted EBITDA margin contracted 130 bps year on year to 21.3%.

Selling, general & administrative expenses as a percentage of revenues shrunk 140 bps year over year to 14.9%.

Moreover, research & development expenses as a percentage of revenues contracted 20 bps to 11.8%.

Operating margin shrunk 420 bps year on year to 8.5%.

Balance Sheet and Cash Flow

Mercury had cash and cash equivalents of $121.9 million as of Apr 2, 2021, up from the $109.1 million witnessed at the end of the previous quarter.

The company generated $23.2 million of cash flow from operating activities. Free cash flow was $13.2 million. During the first nine months of fiscal 2021, the company generated $70.1 million of operating cash flow and $35.3 million of free cash flow.

Guidance

For the fourth quarter of fiscal 2021, revenues are projected at $236.5-$246.5 million.

Adjusted EBITDA is anticipated in the band of $58.1-$60 million. Adjusted earnings are estimated to be 66-69 cents per share.

Mercury lowered its full-year revenue guidance to $910-$920 million from $925-$945 million.

The adjusted EBITDA forecast has also been lowered and narrowed to $201-$203 million from the $201-$206 million projected earlier. Adjusted earnings are now estimated to be $2.35-$2.37 per share compared with the previous expectation of $2.35-$2.42 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 -9.02% due to these changes.

VGM Scores

At this time, Mercury Systems has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. Charting a somewhat similar path, 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 #3 (Hold). We expect an in-line return from the stock in the next few months.


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