Over the past six months, Mercury Systems has been a great trade. While the S&P 500 was flat, the stock price has climbed by 31.9% to $50.45 per share. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is there a buying opportunity in Mercury Systems, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Mercury Systems Will Underperform?
We’re glad investors have benefited from the price increase, but we don't have much confidence in Mercury Systems. Here are three reasons why MRCY doesn't excite us and a stock we'd rather own.
1. Core Business Falling Behind as Demand Declines
Investors interested in Defense Contractors companies should track organic revenue in addition to reported revenue. This metric gives visibility into Mercury Systems’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.
Over the last two years, Mercury Systems’s organic revenue averaged 5.3% year-on-year declines. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests Mercury Systems might have to lean into acquisitions to grow, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus). 
2. EPS Trending Down
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Sadly for Mercury Systems, its EPS declined by 28% annually over the last five years while its revenue grew by 3.3%. This tells us the company became less profitable on a per-share basis as it expanded.
3. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Mercury Systems’s ROIC has decreased over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
Mercury Systems doesn’t pass our quality test. With its shares outperforming the market lately, the stock trades at 70.5× forward P/E (or $50.45 per share). This multiple tells us a lot of good news is priced in - we think there are better stocks to buy right now. We’d suggest looking at a top digital advertising platform riding the creator economy.
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