Challenging Outlook for Mercury Systems: Sell Rating Justified by Weak Financials and CPA Program Concerns

Mercury Systems (MRCY – Research Report), the Industrials sector company, was revisited by a Wall Street analyst today. Analyst Sheila Kahyaoglu from Jefferies maintained a Sell rating on the stock and has a $24.00 price target.

Sheila Kahyaoglu’s rating is based on a confluence of challenging factors impacting Mercury Systems. Despite the company’s management reaffirming its revenue guidance for fiscal year 2024 and a promise of positive free cash flow, the recent financial results have been less than satisfactory. The adjusted EBITDA came in at a negative $2 million, and free cash flow was negative $26 million. These disappointing figures are compounded by a year-over-year revenue decline of 17%. While there are some positive signs, such as a reduction in working capital and a majority of fixed-price bookings shifting from development to production, these are overshadowed by considerable negatives, including significant estimated costs at completion and negative gross margins for their Common Processing Architecture (CPA) program.

Moreover, Kahyaoglu points out that the CPA initiative, which has faced technical setbacks, is contributing to a complex and negative financial picture for Mercury Systems. Although the CPA has now entered pilot production, its full-rate production is not expected until at least the first quarter of fiscal year 2025. Additionally, the company has experienced high estimated costs at completion, which, while showing a downward trend, remain a concern. The company’s cash flow has also not met break-even guidance, which places further stress on its financial standing. With a cautious outlook on the company’s ability to revitalize growth and manage working capital effectively, Kahyaoglu has thus assigned a Sell rating to Mercury Systems’ stock.

Kahyaoglu covers the Industrials sector, focusing on stocks such as Boeing, GE Aerospace, and General Dynamics. According to TipRanks, Kahyaoglu has an average return of 10.2% and a 63.16% success rate on recommended stocks.

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Mercury Systems (MRCY) Company Description:

Mercury Systems, Inc. engages in the provision of secure sensor and safety critical mission processing subsystems. It offer products under the following categories: Components, Modules and Sub-Assemblies, and Integrated Subsystems. The Components category refers to technology elements typically performing a single, discrete technological function, which when physically combined with other components may be used to create a module or sub-assembly. The Modules and Sub-Assemblies category includes combinations of multiple functional technology elements and components that work together to perform multiple functions, but are typically resident on or within a single board or housing. The Integrated Subsystems category covers multiple modules and sub-assemblies combined with a backplane or similar functional element and software to enable a solution. The company was founded on July 14, 1981 and is headquartered in Andover, MA.