Analyst Ronald Epstein of Bank of America Securities reiterated a Sell rating on Mercury Systems (MRCY – Research Report), with a price target of $20.00.
Ronald Epstein has given his Sell rating due to a combination of factors, primarily centered on Mercury Systems’ inability to provide a clear future outlook and ongoing issues with cost management. The company, which operates in the defense electronics sector, has historically expanded through a strategy of mergers and acquisitions. However, Epstein points out that Mercury Systems has faced challenges with integrating these acquisitions effectively, leading to a lack of program oversight and increasing costs. A recent decision to withdraw their fiscal year 2024 outlook further underscores these issues, despite ongoing restructuring efforts aimed at addressing them. Epstein’s lowered price objective to $20 reflects his reduced earnings estimates for the company, indicating skepticism about Mercury Systems’ capacity to get a handle on their cost control issues in the near term.
Epstein also acknowledges that while Mercury Systems is making strides in rectifying its cost structure and closing out problematic programs, quarter-over-quarter cost growth persists. Although these challenges are not recurring, they continue to affect the company’s revenue and margins negatively. Epstein notes progress in managing working capital, evidenced by stronger customer advances and reductions in accounts, unbilled receivables, and inventory. However, he believes that the return to historical free cash flow conversion rates will be slow. He maintains the Underperform rating until there is a tangible improvement in cost management, with a price objective that takes into account a more conservative multiple relative to defense industry peers and reflects the company’s operational streamlining efforts.
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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.
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