Defense contractor Mercury Systems delivered a stellar fiscal first quarter as backlog set a record on robust military demand, and an expanding market for its technology that helps missiles steer in-flight.
The performance drew quick praise from J.P. Morgan. Analyst Seth Seifman upgraded the stock to Overweight from Neutral and set a $102 price target. He cited restored confidence in management alongside explosive bookings, which he expects could bring sustainable double-digit sales growth for fiscal 2027.
Investors welcomed the call, sending shares of Mercury Systems up 3.4% to $86.38 in premarket trading Wednesday. In the previous session, the stock closed up 4.9%.
Mercury's top and bottom lines handily topped analysts' estimates. Revenue totaled $253 million for the first quarter, above Wall Street's calls for $245 million and up from $225 million a year ago. Mercury posted adjusted earnings of 52 cents a a share, surpassing analysts' consensus estimates of 30 cents.
Underpinning that beat was heavy demand across core defense programs. Mercury booked roughly $370 million in new orders during the quarter, fueled by huge orders for missile, radar, and electronic warfare parts. That brought its order backlog to an all-time high of $2.1 billion, a milestone Seifman noted could secure the company's growth pipeline for years to come.
While Mercury has long been known for its radar processors, its "other sensor and effector" category has emerged as one of its fastest growing areas with sales growing 33% from a year ago.
The segment, which provides guidance electronics, targeting processors, and radio-frequency seeker components that track targets and steer missiles in mid-flight, has benefited directly from prime contractors ramping up major missile production lines.
Mercury relies heavily on larger contractors like Lockheed Martin, Northrop Grumman, and Raytheon. Seifman estimated these three clients buy about $95 million per quarter combined, which makes up more than 35% of Mercury's total revenue.
Operationally, the turnaround has also translated into improved profitability. Seifman called Mercury's margin recovery the "most striking aspect" of the report: Gross margin climbed to 35.2% in the first fiscal quarter, marking its best level since the second quarter of 2023. Management attributed the margin rebound to a more favorable mix in the quarter and improved average backlog margin.
Seifman said while there may be occasional bumpy quarters as new contracts ramp up, he thinks profits will creep even higher as older, lower-margin contracts phase out.
Mercury also raised its outlook for fiscal 2027, saying it now expects revenue to grow in the double digits, up from a previous forecast of "approaching double digits." Management anticipates total revenue to approach $1.1 billion.
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