(RTTNews.com) - An improving defense environment, strong backlog, and sustained growth in revenue and profitability above industry average levels make Mercury Systems, Inc. ( MRCY ) worth watching. The stock is nearly 30% off its 52-week high of $55.
A commercial provider of secure sensor and safety-critical processing subsystems, Mercury Systems is pioneering a next-generation defense electronics business model to power critical defense and intelligence programs. The company's products and solutions are deployed across 300+ programs with 25+ prime defense contractors.
Mercury Systems focuses on core markets - Aerospace and Defense (A&D) electronics valued at $103 billion in 2018, and estimated by industry experts to reach $117 billion in another 4 years. The U.S. Defense electronics systems slice at $51 billion is nearly a half of the total global market.
Reforms in U.S. Defense procurement are inspiring a shift toward a firm, fixed- price contract model. This in turn, is pushing prime contractors to outsource more work to commercial companies with cost-effective solutions to help navigate an increasingly uncertain budgetary and procurement environment. As a value-added Subsystem Solution Provider for defense prime contractors, Mercury Systems seems well-positioned to capitalize from this trend.
The company's pre-integrated subsystems in support of critical defense programs drive down procurement costs by lowering integration expenses (a substantial cost) for customers. Within a fixed-price contracting environment, the company's solutions accelerate customers' time-to-market to 12 months vs. the usual 36-plus months it takes for traditional COTS or Commercial Off-The-Shelf product integration.
Acquisitions and investments have tripled the total potential value of opportunities to $4.9 billion in the last 5 years. From a total pipeline of $1.59 billion in 2013, the company's Top 30 programs and pursuits now boast an estimated lifetime value of $4.9 billion in 2018. A disciplined and focused M&A strategy has significantly expanded the company's total addressable market to include missiles, precision guided munitions and homeland security, while strengthening and deepening penetration in commercial aerospace, defense platform management and mission computing markets.
Mercury Systems sees a host of opportunities in weapons, and military applications such as EW (Electronic Warfare) and C4ISR (Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance). Investment in EW and C4ISR is expected to grow, to combat globally evolving threats. Market research firm Frost & Sullivan estimates that $42 billion was spent on C4ISR technology in 2017 with a growth rate of 3% through 2022. According to Frost & Sullivan, the fastest growing C4ISR application area is electronic warfare, and that was up 22% from 2016 budget.
The Bipartisan Budget Act of 2018 raised the cap for the U.S. national defense budget by 14.5% or $80 billion for FY18 and by $85 billion or 15% for FY19. As a departure from stricter restrictions, the Trump administration now allows the sale of defense products to foreign countries. While President Trump and the Republican-controlled congress continue to push for higher defense spending, Mercury Systems has its growth drivers and capabilities well aligned to benefit from the Department of Defense investment priorities.
In the last 5 years, the company has grown revenues from $194 million in 2013 to $409 million in 2017, and the expected number for 2018 lies between $487 million and $492 million. Strong revenue growth and operating leverage have led to robust adjusted EBITDA growth.
Adjusted EBITDA has grown from $9.9 million in 2013 to $93.9 million in 2017 with the Revenue to Adjusted EBITDA trends growing from 5% in 2013 to 23% in 2017. For 2018, the company expects Adjusted EBITDA of $111 million to $113.5 million, which implies 22.8% to 23% of projected 2018 revenues.
The company exited 2017 with a backlog of $357 million and at March 31, 2018, Mercury's total backlog was a record $429.3 million, a long way from a backlog of $136 million at FY13-end.
How does the company fare against its peers? In the last twelve months (based on most recently reported quarters), TIER 2 DEFENSE INDEX posted a EBITDA margin of 18% vs. 23% by Mercury Systems. The TIER 2 DEFENSE INDEX has a 4-year Revenue CAGR (Compound Annual Growth Rate) of 1% vs. 22% for the company.
Looking ahead, Mercury Systems sees FY18 adjusted EPS of $1.35 to $1.38 per share. Analysts are modeling earnings of $1.36 and revenues of $489.6 million.
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