JPMorgan turns bullish on Mercury Systems after earnings beat

JPMorgan has upgraded Mercury Systems to overweight from neutral, calling the aerospace and defense contractor’s latest earnings report a “key proof point.” Although the bank trimmed its price target to $102 from $110, the revised forecast still implies roughly 22% upside from Tuesday’s close.

Mercury Systems on Tuesday reported fiscal first-quarter earnings and revenue that topped expectations. The company also lifted its full-year adjusted EBITDA guidance and raised its revenue growth outlook.

It was a strong quarter for Mercury, analyst Seth Seifman wrote in a Wednesday note—strong enough that it may be difficult to repeat in the quarters ahead. Even so, he does not see the recent results as the ceiling for the business.

“Strong bookings boosted the backlog, providing visibility to support our expectation for double-digit sales growth,” Seifman said. “And with net leverage set to reach roughly 0.5x by June 30, management should have more flexibility for cash deployment.”

Especially encouraging to Seifman was that bookings were spread across missiles, radar, and other electronic-warfare technologies. But he singled out the most striking figure in the report: a 35.2% gross margin, the highest the company has posted since its second quarter in fiscal 2023. According to Seifman, that number is central to gauging the profitability of Mercury’s backlog—and to recognizing how much room the company still has to grow.

“Winning new business in a high-demand environment will govern the overall maturity of the programs in Mercury’s portfolio,” he said. “Even so, it’s hard to escape the conclusion that Mercury’s Q1 performance shows the company can deliver this kind of return on sales—and more—over time.”

Source link