Mercury Systems
’
MRCY
shares rallied 10.3% on Thursday after activist investor, JANA Partners LLC, revealed acquiring a 6.6% stake in the aerospace and defense contractor.
In a filing with the U.S. Securities And Exchange Commission (“SEC”) under Schedule 13D, JANA Partners revealed buying roughly 3.73 million common stocks of Mercury Systems for approximately $181.1 million, with an option to purchase additional 173,300 shares. The filing showed that the activist firm was building its stake in Mercury Systems for nearly two months.
JANA Might Push Mercury Systems’ Sale
Founded in 2001 by Barry Rosenstein, JANA Partners LLC is an investment manager specializing in event-driven investing. The investment firm has a reputation of working collaboratively, behind the scenes with target companies as well as investing in those organizations where there is a possibility of a clear value-driven catalyst.
In the filing with SEC, JANA Partners said that it intends to have discussions with Mercury Systems’ management to consider ways to maximize shareholder value. The discussion would be aimed at “evaluating strategic alternatives, including a sale of the Issuer, operations, capital allocation, corporate governance, board composition and compensation practices,” per the
filing
.
JANA Partners believes that Mercury Systems’ shares are undervalued. Despite over 10% surge on Thursday, shares of MRCY are down 36.7% so far this year compared with the S&P 500’s gain of 26.2%.
Image Source: Zacks Investment Research
Growth on Product Strength & Acquisitions
Mercury is benefiting from modernization in radar, electronic warfare and C4I, which is providing it with new opportunities in weapon systems, space, avionics processing, and mission computing and embedded rugged services. Domain expertise in analog and digital integration has helped it build a solid long-term relationship with defense prime contractors.
Robust organic growth, including expansion of the microelectronics business, is aiding Mercury’s growth. Strong demand for products, resulting in significant deal wins is driving sales.
Additionally, Mercury Systems has a history of expanding through acquisitions. In November 2021, the company completed the buyout of Florida-based avionics maker, Avalex Technologies Corporation. Since 2014, it has completed 15 acquisitions, which have added significant value to the company and expanded its total addressable market.
In the first quarter of fiscal 2022, Mercury Systems reported revenues (18.3% of total revenues) of $41.3 million, primarily attributable to the acquisitions of Physical Optics Corporation and Pentek. These continued acquisitions will fuel the company’s growth.
However, pandemic-related modernization delays and customer execution issues are likely to continue impacting the company’s revenues in the near term. Though Mercury has been steadily winning federal contracts, these low-margin deals are likely to affect its profitability in the long run.
Zacks Rank & Stocks to Consider
Currently, Mercury Systems carries a Zacks Rank #3 (Hold).
Some better-ranked stocks from the broader technology sector include Google-parent
Alphabet
GOOGL
,
Diodes
DIOD
and
PTC Inc.
PTC
, each sporting a Zacks Rank #1 (Strong Buy). You can see
the complete list of today’s Zacks #1 Rank stocks here
.
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