Defense Modernization Will Unlock A Bright Future

AN
AnalystConsensusTarget
Consensus Narrative from 7 Analysts
Published
22 Mar 25
Updated
08 Aug 25
AnalystConsensusTarget's Fair Value
US$52.71
0.2% overvalued intrinsic discount
08 Aug
US$52.83
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1Y
48.4%
7D
1.3%

Author's Valuation

US$52.7

0.2% overvalued intrinsic discount

AnalystConsensusTarget Fair Value

Last Update24 Apr 25
Fair value Increased 20%

Key Takeaways

  • Strong demand from defense sector modernization and secure computing positions Mercury for sustained growth and higher revenue per platform.
  • Operational efficiencies and margin-focused initiatives are improving profitability and free cash flow, supporting long-term shareholder value.
  • Weak order growth, limited top-line expansion, and declining R&D investment threaten competitiveness and profitability, with reliance on legacy contracts increasing exposure to revenue and margin volatility.

Catalysts

About Mercury Systems
    A technology company, manufactures and sells components, products, modules, and subsystems for defense prime contractors, the U.S.
What are the underlying business or industry changes driving this perspective?
  • Strengthening defense budgets and ongoing global security tensions are translating into multi-year demand visibility, with new and follow-on contract awards for key platforms (e.g., LTAMDS, F-35, radar, electronic warfare) driving a rising backlog and above-market organic growth-supporting revenue acceleration as these programs ramp into full production.
  • The drive to modernize legacy military platforms and adopt secure, open-architecture, digital processing systems is fueling recurring upgrade and retrofit cycles, which, combined with Mercury's leadership in ruggedized, mission-critical computing, positions the company for sustained pipeline growth and expanding content per platform-positively impacting long-term revenue trends.
  • Operational initiatives to streamline SG&A, reduce R&D spend, and increase manufacturing efficiency (including outsourcing non-core operations) are materially lowering operating expenses and driving improved operating leverage, setting up a path for higher EBITDA margins as mix shifts further toward higher-margin production work.
  • Steady replacement of low-margin backlog with new, higher-margin orders-enabled by tighter program management and improved contract discipline-will continue to drive gross margin expansion, supporting a long-term improvement in both net margins and earnings quality.
  • Success in working capital reduction and improved execution on deliveries/milestone events is resulting in robust free cash flow generation, with further room for working capital optimization-enabling increased free cash conversion and potential deleveraging, supporting shareholder value creation.

Mercury Systems Earnings and Revenue Growth

Mercury Systems Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?
  • Analysts are assuming Mercury Systems's revenue will grow by 5.5% annually over the next 3 years.
  • Analysts assume that profit margins will increase from -7.3% today to 2.5% in 3 years time.
  • Analysts expect earnings to reach $26.5 million (and earnings per share of $0.8) by about August 2028, up from $-65.1 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $37.3 million in earnings, and the most bearish expecting $13.6 million.
  • In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 150.8x on those 2028 earnings, up from -48.3x today. This future PE is greater than the current PE for the US Aerospace & Defense industry at 35.4x.
  • Analysts expect the number of shares outstanding to grow by 0.59% per year for the next 3 years.
  • To value all of this in today's terms, we will use a discount rate of 8.06%, as per the Simply Wall St company report.

Mercury Systems Future Earnings Per Share Growth

Mercury Systems Future Earnings Per Share Growth

Risks

What could happen that would invalidate this narrative?
  • Persistent low-double-digit EBITDA margins expected for FY '25 reflect ongoing drag from legacy low-margin backlog and suggest that achieving target low-to-mid 20% margins will be gradual, constraining profitability and net income in the near-to-medium term.
  • Recent book-to-bill ratio dipping below 1 for consecutive quarters signals possible deceleration in order growth, which, if persistent, could pressure future revenues and reduce visibility into long-term top-line expansion.
  • Revenue growth for FY '25 is guided toward only mid-single digits and Q4 revenue is expected to be flat year-over-year due to prior-period delivery pull-forwards, indicating near-term topline stagnation that may challenge long-term growth narratives and impact earnings scalability.
  • Declining R&D spend and accelerated cost reductions, while improving short-term cash flow and margins, risk underinvesting in innovation, which could threaten Mercury's differentiation versus competitors in an industry experiencing secular shifts toward advanced technology and open architectures, thereby endangering future revenue streams.
  • Ongoing exposure to customer budget and program timing-particularly reliance on large platforms and production contracts-coupled with lag in C4I and electronic warfare segments, poses risk of revenue volatility and diminished margin expansion should customer priorities or funding shift, impacting both revenue and earnings predictability.

Valuation

How have all the factors above been brought together to estimate a fair value?
  • The analysts have a consensus price target of $52.714 for Mercury Systems based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $60.0, and the most bearish reporting a price target of just $35.0.
  • In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.0 billion, earnings will come to $26.5 million, and it would be trading on a PE ratio of 150.8x, assuming you use a discount rate of 8.1%.
  • Given the current share price of $52.62, the analyst price target of $52.71 is 0.2% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  • We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.

How well do narratives help inform your perspective?

Disclaimer

AnalystConsensusTarget is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by AnalystConsensusTarget are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. Simply Wall St may provide the securities issuer or related entities with website advertising services for a fee, on an arm's length basis. These relationships have no impact on the way we conduct our business, the content we host, or how our content is served to users. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that AnalystConsensusTarget's analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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