Military

Did Mercury Systems Just Become the Perfect Trump Stock?

Jon C. Ogg

Published: January 24, 2017 1:25 pm

Last Updated: January 12, 2020 3:35 pm

The post-election rally in 2016 was massive, and now the markets have listed sideways for most of the past month as 2017 gets underway. Donald Trump did not wait until he was president to go after companies that were planning to make new moves to outsource manufacturing jobs. Now the theme of “Made in America” has come back strong. One such company that may be in the perfect spot for Trump’s Made in America theme is Mercury Systems Inc. (NASDAQ: MRCY).

After Mercury Systems reported earnings, Merrill Lynch raised its rating on the stock to Buy. Mercury Systems shares were up 7% late Monday, after the aerospace and defense company managed to beat expectations on revenues and earnings, earning about $5.2 million in the quarter. And the shares were up even more on Tuesday.

Merrill Lynch’s Ronald Epstein and team noted that Mercury Systems was able to record a book to bill of 1.11 in the second quarter. What matters here is that it was a quarter in which the U.S. government was funded under a continuing resolution.

Merrill Lynch also raised its price objective to $39 from a prior target of $34. The firm discussed how Mercury is finding itself as a Trump stock as well:

Considering this strong positive momentum in a quarter that included the U.S. Presidential election and change in party leadership at the White House, we may have underestimated the magnitude of outsourcing initiatives at defense primes. With a potentially more protectionist Trump Administration, we now expect higher growth for Mercury Systems.

Estimates for 2017 and further out were raised by Merrill Lynch as follows:

• FY17 sales to $403 million from $390 million on strong 2QFY17 bookings of $109 million and better than expected topline synergies from the Microsemi businesses (acquired in May 2016).
• Mercury Systems said revenue synergies from the acquisition increased the growth trajectory of the Microsemi businesses from mid-single digits to high-single digits.
• Merrill Lynch now expects sales to grow at 11% per year from 2017 to 2021, up from a prior forecast of 8% annual growth.
• EBITDA margins are now 22.6% in 2017 versus a prior 22.4% estimate with a 340 basis point improvement versus a prior 220 basis point target.
• Adjusted EPS estimate was raised to $1.15 from $1.10 in FY2017.
• Adjusted EPS estimate was raised to $1.35 from $1.20 in FY2018.
• Adjusted EPS estimate was raised to $1.60 from $1.30 in FY2019E.
• Adjusted EPS estimate was raised to $1.80 from $1.45 in FY2020E.
• Adjusted EPS estimate was raised to $1.95 from $1.55 in FY2021.

Merrill Lynch justified its price objective hike as follows:

Our $39 price objective is calculated using an EV/EBITDA multiple of 14x our CY18 EBITDA estimate. In our view, a multiple at the higher end of the across-industry peer group is supported by Mercury Systems’ strong EBITDA margins and higher than peer growth outlook. The peer group includes companies within the Computer Hardware & Storage, IT Services, Defense Primes, and Smid-Cap Aerospace and Defense industries.

According to Merrill Lynch:

Mercury Systems is a leader in secure and affordable defense electronic solutions for the US Department of Defense (DoD). The company is a beneficiary of the DoD’s initiatives to reduce cost by using commercial off the shelf (COTS) solutions for defense electronics. Increased use of COTS and an upturn in US defense spending can provide long-term growth.

Shares of Mercury Systems were up 10.9% at $34.87 on Tuesday in midday trading. Its share volume of 1.6 million shares was also about five times normal trading volume with almost three hours left in the day. Mercury Systems has a 52-week trading range of $16.29 to $35.22 and a consensus analyst price target of $34.33 in the Thomson Reuters mean estimates.