On Monday (NASDAQ:MNDY), Jefferies made a notable adjustment to its stance on Mercury Systems (NASDAQ:MRCY), a company listed on NASDAQ under the ticker MRCY. The firm's analyst upgraded the stock from Underperform to Hold and increased the price target to $42.00, up from the previous $30.00. The revision follows Mercury Systems' first fiscal quarter performance, which indicated several positive developments within the company.
The analyst highlighted that Mercury Systems had established a stable base, citing a 13% organic growth and the transition to full-rate production in the second half of the fiscal year. Other factors contributing to the positive outlook included lower estimated costs at completion (EACs) leading to 10.5% margins, a 90% production mix of bookings at 1.2 times the trailing twelve months (TTM), and a 15% year-over-year decrease in working capital.
Despite the soft fiscal year 2025 guidance, which anticipates flat revenues, low double-digit margins, and increased free cash flow (FCF), the analyst believes these targets are surmountable before a return to normalcy in fiscal year 2026. That year is expected to see a 9% increase in revenues and 18% margins.
The upgrade to Hold comes with a cautionary note regarding the quality of Mercury Systems' free cash flow, which the analyst describes as "extremely weak." Nonetheless, the new $42 price target implies a premium multiple valuation of 16 times EBITDA, with a 3.2% yield. This adjustment in Mercury Systems' stock rating and price target reflects a more optimistic view of the company's financial health and market position.
In other recent news, Mercury Systems has been making significant strides in its financial performance. The company recently reported a 29% increase in Q1 bookings, reaching $247.7 million, and a record backlog of over $1.3 billion, up 16% from the previous year. Revenue for the quarter was also up 13%, at $204.4 million. This positive financial performance led Jefferies to upgrade Mercury Systems' stock rating from Underperform to Hold and raise the price target to $42.00.
Despite the upgrade, Jefferies expressed caution regarding Mercury Systems' free cash flow quality, which was described as "extremely weak." However, the firm noted several positive indicators from the company's first fiscal quarter results, including a 13% organic growth and a 10.5% margin due to reduced Estimates at Completion (EACs).
These are just some of the recent developments at Mercury Systems. Analysts from Jefferies believe the company's soft guidance for fiscal year 2025, which anticipates flat revenues, low double-digit margins, and increased free cash flow, is achievable. This sets the stage for a normalized fiscal year 2026 with expectations of a 9% revenue increase and 18% margins.
InvestingPro Insights
Recent data from InvestingPro adds depth to Jefferies' upgraded outlook on Mercury Systems (NASDAQ:MRCY). The company's market capitalization stands at $2.55 billion, reflecting investor confidence in its potential. Despite not being profitable over the last twelve months, InvestingPro Tips suggest that net income is expected to grow this year, aligning with the analyst's projection of improved performance in fiscal year 2026.
The stock's recent performance has been notably strong, with InvestingPro data showing a 28.42% return over the last week and a 52.55% return over the past six months. This momentum has pushed MRCY to trade near its 52-week high, with the price at 98.55% of its peak. However, an InvestingPro Tip cautions that the RSI suggests the stock may be in overbought territory, which investors should consider alongside Jefferies' upgraded stance.
Financially, Mercury Systems operates with a moderate level of debt, and its liquid assets exceed short-term obligations, potentially supporting the company's transition to full-rate production as mentioned in the Jefferies report. These insights, along with 11 additional tips available on InvestingPro, provide a comprehensive view of MRCY's current market position and future prospects.
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