Mercury Systems Stock Is an Attractive Avionics Stock for the Economic Reopening

Mercury Systems Inc Builds Next-Generation Avionics

The COVID-19 pandemic sent the aviation sector into a tailspin, but with the reopening of the global economy, the demand for air travel will rise again.

That should help Mercury Systems Inc (NASDAQ:MRCY), a developer of hardware and software for the commercial aviation and defense segments. MRCY stock investors will likely benefit from the recovery in commercial aviation, along with growth in military budgets as global tensions elevate.

The following chart shows that Mercury Systems stock is below the midpoint of its 52-week range after declining from its range high of $79.45 in April 2021. In April 2020, MRCY stock traded at $96.29.

The selling of Mercury Systems stock provides contrarian investors with a strong risk/reward opportunity over the next few years as Mercury Systems Inc’s fundamentals improve.

Chart courtesy of StockCharts.com

Mercury Systems Inc to Surpass $1-Billion Revenue Threshold

Mercury Systems Inc’s steady rise in revenues over the past four years has been driven by the company’s aggressive slate of acquisitions.

The company grew its revenues by 126% from fiscal 2017 (ending in June) to a record level in 2021. Mercury Systems Inc reported four straight years of double-digit revenue growth and a compound annual growth rate (CAGR) of 22.6%.

But now, with its acquisitions slowing, the company needs to focus on its organic growth. Analysts estimate that its revenues will jump by 11.4% to $1.0 billion in fiscal 2022, followed by 10.1% to $1.1 billion in fiscal 2023. (Source: “Mercury Systems, Inc. (MRCY),” Yahoo! Finance, last accessed January 28, 2022.)

This implies a forward multiple of three times the company’s consensus revenue estimate for 2023, which is reasonable, given the current market.

(Source: “Mercury Systems Inc.” MarketWatch, last accessed January 28, 2022.)

At the same time, Mercury Systems Inc has consistently produced earnings before interest, taxes, depreciation, and amortization (EBITDA). The company’s EBITDA CAGR of 23.7% was above its revenue CAGR of 22.6%.

(Source: Ibid.)

At the bottom line, Mercury Systems Inc has generated profits based on generally accepted accounting principles (GAAP) diluted earnings per share (EPS), with growth in three of the last four years.

After adjusting for non-recurring expenses, Mercury Systems Inc reported profits of $2.42 per diluted share in 2021. The consensus analysis has this rising to $2.55 in 2022 and to $2.87 in 2023. (Source: Yahoo! Finance, op. cit.)

Mercury Systems Inc managed to beat the consensus EPS estimate in five consecutive quarters, up to the fiscal first quarter.

The company’s forward 2023 EPS multiple of 19.5 is attractive.

(Source: MarketWatch, op. cit.)

Mercury Systems Inc has delivered consistent positive free cash flow (FCF). The company’s steady stream of FCF can be used to reduce its $286.5-million debt.

(Source: Ibid.)

Analyst Take

Mercury Systems Inc has strong institutional ownership, with 351 institutions holding the majority of MRCY stock. Insiders have also been buying Mercury Systems stock, to the tune of a net 254,210 shares over the last six months. (Source: Yahoo! Finance, op. cit.)

It might be a good idea to take the lead from the institutional investors and insiders, especially considering MRCY stock’s current price weakness.