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Mercury Systems Tumbles on Lowered Guidance

Mercury Systems says 'the challenging environment may persist through the first half of next fiscal year.'
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Mercury Systems  (MRCY) - Get Mercury Systems Inc Report tumbled Wednesday after the aerospace and defense company beat Wall Street's third-quarter earnings expectations but fell short on fourth-quarter and full-year guidance.

Shares of the Andover, Mass., company were falling 17.16% to $58.17.

Mercury Systems reported net income of $15.6 million, or 28 cents a share, compared with $23.6 million, or 43 cents a share, a year ago. Adjusted earnings came to 64 cents a share, surpassing the FactSet consensus of 62 cents a share.

Revenue totaled $256.9 million, up from $208 million a year ago, and beating the FactSet consensus of $253.3 million.

"Our results continue to reflect the impact of COVID, the change in administrations, delays in foreign military sales as well as customer program execution issues," Mark Aslett, president and CEO said during a conference call with analysts.

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Looking ahead, the company said it expected fourth-quarter earnings to range from 35 cents to 38 cents a share, with revenue ranging from $236.5 million to $246.5 million.

The FactSet consensus calls for earnings of 70 cents a share on $253.7 million in sales.

For 2021, Mercury Systems forecast earnings of $1.14 to $1.17 a share and revenue ranging from $910 million to $920 million. 

The FactSet consensus is looking for income of $2.39 a share and $925.2 million.

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Aslett said the company is expecting a slight decline in bookings in 2021.

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"Our optimism and outlook for the business remain positive," he said, according to a transcript of the call. "We believe, however, that the challenging environment may persist through the first half of next fiscal year."

 Canaccord Genuity analyst Ken Herbert downgraded Mercury Systems to hold from buy with a price target of $74, down from $94. 

Herbert said that while third-quarter results were in line with prior guidance, the implied step-down in fiscal fourth-quarter growth is a concern, according to the Fly. 

He said that he thinks investor confidence in the company's five-year sales outlook will be impacted by the recent program delays and budget risk despite management's confidence.

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William Blair analyst Jonathan Ho, who has an outperform rating on the stock, said investors are likely concerned about weakness in organic growth rates, Bloomberg reported. 

“However, we believe that many of the factors the company cited were largely outside its control, with no actual cancellations of deals or performance issues," he said, "and instead these orders are for critical programs that are well funded and unlikely to be terminated."

Truist analyst Michael Ciarmoli, who has a buy rating on the stock, cut his price target to $90 from $102 a share. He said a that a similar order-timing issue hit the stock in 2018 but the long-term thesis remained intact and the shares ultimately recovered.

“We see a similar situation playing today but believe the co is positioned to grow faster than peers," he said.