Although Mercury Systems (currently trading at $80.14 per share) has gained 14.7% over the last six months, it has trailed the S&P 500’s 22.1% return during that period. This might have investors contemplating their next move.
Is now the time to buy Mercury Systems, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is Mercury Systems Not Exciting?
We’re cautious about Mercury Systems. Here are three reasons why MRCY doesn’t excite us, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Regrettably, Mercury Systems’s sales grew at a weak 1.3% compounded annual growth rate over the last five years. This fell short of our benchmarks.
2. Operating Losses Sound the Alarm
Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses — everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.
Although Mercury Systems was profitable this quarter from an operational perspective, it’s generally struggled over a longer time period. Its expensive cost structure has contributed to an average operating margin of negative 3.3% over the last five years. Unprofitable industrials companies require extra attention because they could get caught swimming naked when the tide goes out. It’s hard to trust that the business can endure a full cycle.
3. 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 15.2% annually over the last five years while its revenue grew by 1.3%. This tells us the company became less profitable on a per-share basis as it expanded.
Final Judgment
Mercury Systems isn’t a terrible business, but it doesn’t pass our bar. With its shares underperforming the market lately, the stock trades at 49.2× forward P/E (or $80.14 per share). This valuation tells us a lot of optimism is priced in - we think there are better opportunities elsewhere. We’d suggest looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.
Stocks We Would Buy Instead of Mercury Systems
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