Subdued Growth No Barrier To Mercury Systems, Inc. (NASDAQ:MRCY) With Shares Advancing 34%

Mercury Systems, Inc. (NASDAQ:MRCY) shareholders have had their patience rewarded with a 34% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 100% in the last year.

Following the firm bounce in price, given close to half the companies operating in the United States' Aerospace & Defense industry have price-to-sales ratios (or "P/S") below 2.8x, you may consider Mercury Systems as a stock to potentially avoid with its 4.7x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

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View our latest analysis for Mercury Systems

How Has Mercury Systems Performed Recently?

Mercury Systems could be doing better as it's been growing revenue less than most other companies lately. It might be that many expect the uninspiring revenue performance to recover significantly, which has kept the P/S ratio from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Mercury Systems.

How Is Mercury Systems' Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as high as Mercury Systems' is when the company's growth is on track to outshine the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 9.2% last year. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 7.7% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 6.1% each year as estimated by the eight analysts watching the company. That's shaping up to be materially lower than the 11% each year growth forecast for the broader industry.

With this information, we find it concerning that Mercury Systems is trading at a P/S higher than the industry. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Key Takeaway

Mercury Systems' P/S is on the rise since its shares have risen strongly. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've concluded that Mercury Systems currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Mercury Systems that you need to be mindful of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.