Mercury Systems Inc. (MRCY) Bullish Thesis

We saw a bullish thesis on Mercury Systems Inc. (MRCY) on ValueInvestorsClub by agentcooper2120. We like VIC because the ideas on their site are generally posted by aspiring analysts who produce quality research. We find the ideas presented on the site well thought out and worthy of a serious look. Click here for the full article. Below we summarized the MRCY bullish thesis:

MRCY is a leading multinational Tier 2 technology company, based in Massachusetts – USA , serving the global aerospace and defense industry. The company develops, manufactures and supplies computer hardware and software products, including secure sensor and mission processing subsystems, avionics mission computers, radio frequency (RF) for defense applications. Its customers come from commercial aviation, aerospace, defense, and security and intelligence industries. MRCY has several overseas offices and annual revenues of $797 million for its fiscal year ending 30 June, 2020.

The Department of Defense (DoD) is currently launching a major modernization drive to accelerate technological capabilities. It has been focusing on increasing budget allocation to improve electronics in the existing as well as new programs, overhauling procurement standards, and empaneling secure domestic supply chains. This paradigm shift in the DoD is helping MRCY expand sales and revenues as Prime contractors need to outsource subsystems to leading edge electronic systems suppliers such as MRCY. The company has no debt, and has the suitable platform to instill growth in its already acquired smaller Tier 3 suppliers that have no bandwidth to scale domestic manufacturing capacity otherwise. Unlike other standard Tier 2 defense suppliers, MRCY’s open architecture system and internal sourcing enables it to produce subsystems at a lower cost than its peers, and hence generate higher margin.

MRCY should be categorized as one of the specialized electronics manufacturers to the DoD, wherein high barriers to new entrants is a positive in growing markets (17.5x-22.5x normalized EV/EBITDA), than typical defense Primes/suppliers (10x-15x normalized EV/EBITDA). The company has strong management team, capability of acquiring sub-scale competition at discounted valuation, wide range of reinvestment opportunities, unique culture, flexible balance sheet with $975 liquidity for M&A opportunities, and international expansion. The company has limited downside as it provides significantly crucial electronic components to DoD for many of their important programs.  With limited alternatives around, MRCY seems to be well-positioned to grow exponentially while a large part of investment community has been underestimating its true potential.

Depending upon the fruition of the analyst’s earnings expectation spread over various scales over the next 5 years, his price target range for MRCY spans from base case @$119 to best case @$237. As of September 2020, the stock is trading at $67.