The recovery of Mercury Systems (MRCY) from the April-end slump seems to have slowed down after a 16% jump. Shares have fallen more than 6% on a 52-week range, and 21% on a year-to-date. The maker of processing systems and software appeared to be caught in the perfect storm of diminishing growth, increasing costs and debt. Market analysts predict the shares to rise in the long run citing to a strong backlog, recovering defense environment and constant revenue growth.
Mercury has been providing sensor and safety-critical mission processing subsystems for various defense and intelligence programs in the United States. Research firm Spruce Point is expecting a 50-80% downside risk for Mercury due to multiple material adverse changes.
The company’s most significant business came from radar systems, but it now appears to be declining due to a rise of competitors. Apart from this, in about 300 programs with 25 prime defense contractors, the company’s products and services are deployed. This includes the Surface Electronic Warfare Improvement Program, F-35, E2D Hawkeye, Predator, Patriot, Gorgon Stare, F-16 SABR, Reaper, Aegis, and Paveway.
In the past, the company’s revenues have risen from $194 million in 2013 to $409 million in 2017. For 2018, market analysts are predicting the company to report revenues between $487 and $492 million and an upbeat earnings range of $1.35 to $1.37 per share.
Spruce Point found that results of Mercury showing growing revenues are not a continuous process. The growth is expected to slow to 6.5% in calendar 2018 from organic revenue growth of 9.5%. The firm expects Mercury to issue stock to lower its debt.
Besides, the research firm believes that the company’s estimate to lose its Small Business status in fiscal 2018 appears to cause an adverse material effect. This could invalidate Mercury from certain business opportunities and rising costs of compliance.
Market analysts are recommending investors to buy the stock as seven of the nine analysts are maintaining a “strong buy” or “buy” rating with an average price target of $51.86. The stock appears to be showing some recovering since April-end.
Shares of Mercury ended Tuesday’s regular trading session up 0.62% at $40.51 on the Nasdaq. The stock had been trading between $30.11 and $55 for the past 52 weeks.
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