On Thursday, Mercury Systems Inc. (NASDAQ:MRCY) experienced an adjustment in its stock outlook. Jefferies has increased the price target on the company's shares to $24.00, up from the previous $20.00. Despite this change, the firm maintains an Underperform rating on the stock.
The adjustment follows Mercury Systems' latest financial report for the third fiscal quarter ending in March, which revealed an adjusted EBITDA of negative $2 million and free cash flow (FCF) of negative $26 million.
Still, management has confirmed its revenue forecast for the fiscal year 2024 to be between $800 million and $850 million, with expectations leaning towards $805 million, marking a 17% decrease year-over-year. Moreover, positive free cash flow is anticipated for FY24, estimated at negative $1 million.
The report noted several positive points, such as an 8% year-over-year decrease in working capital and 80% of firm-fixed-price (FFP) bookings now being production rather than development. The company has advanced its cost-plus-award-fee (CPA) contracts into pilot production.
Still, these positives are counterbalanced by some negative aspects, including $16 million in estimated costs at completion (EACs) and negative gross margins on CPA contracts.
Jefferies predicts a turning point for Mercury Systems' profitability, but suggests it is premature to declare a clear profit trajectory at this stage. The valuation of Mercury Systems by Jefferies is based on a 4.6% free cash flow yield, which is projected upon a return to peak FCF in FY26.
This long-term perspective reflects the analyst's cautious optimism about the company's financial performance in the coming years.
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