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Aerospace and defense company Mercury Systems (NASDAQGS:MRCY) reported Q2 CY2024 results exceeding Wall Street analysts’ expectations, with revenue down 1.8% year on year to $248.6 million. It made a non-GAAP profit of $0.23 per share, improving from its profit of $0.11 per share in the same quarter last year.
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Mercury Systems (MRCY) Q2 CY2024 Highlights:
- Revenue: $248.6 million vs analyst estimates of $230.5 million (7.8% beat)
- EPS (non-GAAP): $0.23 vs analyst estimates of -$0.04 ($0.27 beat)
- Gross Margin (GAAP): 29.5%, up from 26.6% in the same quarter last year
- EBITDA Margin: 12.5%, up from 8.7% in the same quarter last year
- Free Cash Flow Margin: 24.7%, up from 1.5% in the same quarter last year
- Backlog: $1.33 billion
- Market Capitalization: $2.01 billion
Founded in 1981, Mercury Systems (NASDAQ:MRCY) specializes in providing processing subsystems and components for primarily defense applications.
Defense ContractorsDefense contractors typically require technical expertise and government clearance. Companies in this sector can also enjoy long-term contracts with government bodies, leading to more predictable revenues. Combined, these factors create high barriers to entry and can lead to limited competition. Lately, geopolitical tensions–whether it be Russia’s invasion of Ukraine or China’s aggression towards Taiwan–highlight the need for defense spending. On the other hand, demand for these products can ebb and flow with defense budgets and even who is president, as different administrations can have vastly different ideas of how to allocate federal funds.
Sales Growth Examining a company’s long-term performance can provide clues about its business quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Regrettably, Mercury Systems’s sales grew at a weak 5% compounded annual growth rate over the last five years. This shows it failed to expand in any major way and is a rough starting point for our analysis.
We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Mercury Systems’s history shows it grew in the past but relinquished its gains over the last two years, as its revenue fell by 8.1% annually.
This quarter, Mercury Systems’s revenue fell 1.8% year on year to $248.6 million but beat Wall Street’s estimates by 7.8%. Looking ahead, Wall Street expects sales to grow 4.4% over the next 12 months, an acceleration from this quarter.
Operating MarginMercury Systems was roughly breakeven when averaging the last five years of quarterly operating profits, inadequate for an industrials business.
Analyzing the trend in its profitability, Mercury Systems’s annual operating margin decreased by 29.1 percentage points over the last five years. The company’s performance was poor no matter how you look at it. It shows operating expenses were rising and it couldn’t pass those costs onto its customers.
This quarter, Mercury Systems generated an operating profit margin of negative 3.2%, in line with the same quarter last year. This indicates the company’s overall cost structure has been relatively stable.
EPSWe track the long-term growth in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth was profitable.
Sadly for Mercury Systems, its EPS declined by 20% annually over the last five years while its revenue grew by 5%. This tells us the company became less profitable on a per-share basis as it expanded.
We can take a deeper look into Mercury Systems’s earnings to better understand the drivers of its performance. As we mentioned earlier, Mercury Systems’s operating margin was flat this quarter but declined by 29.1 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its lower earnings; taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.
Like with revenue, we also analyze EPS over a shorter period to see if we are missing a change in the business. For Mercury Systems, its two-year annual EPS declines of 54.8% show its recent history was to blame for its underperformance over the last five years. These results were bad no matter how you slice the data.
In Q2, Mercury Systems reported EPS at $0.23, up from $0.11 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street is optimistic. Analysts are projecting Mercury Systems’s EPS of negative $0.69 in the last year to reach break even.
Key Takeaways from Mercury Systems’s Q2 Results We were impressed by how significantly Mercury Systems blew past analysts’ revenue, EPS, and free cash flow expectations this quarter. We were also excited its backlog, an indicator of future sales, outperformed Wall Street’s estimates. Zooming out, we think this quarter featured some important positives. The stock traded up 17.2% to $39.84 immediately after reporting.
