Mercury Systems (MRCY)

Aerospace and defense company Mercury Systems (NASDAQ:MRCY) reported Q3 CY2025 results topping the market’s revenue expectations, with sales up 10.2% year on year to $225.2 million. Its non-GAAP profit of $0.26 per share was significantly above analysts’ consensus estimates.

Company Overview

Founded in 1981, Mercury Systems (NASDAQ:MRCY) specializes in providing processing subsystems and components for primarily defense applications.

Defense contractors typically require technical expertise and government clearance. Companies in this sector can also enjoy long-term contracts with government bodies, leading to more predictable revenues. Combined, these factors create high barriers to entry and can lead to limited competition. Lately, geopolitical tensions–whether it be Russia’s invasion of Ukraine or China’s aggression towards Taiwan–highlight the need for defense spending. On the other hand, demand for these products can ebb and flow with defense budgets and even who is president, as different administrations can have vastly different ideas of how to allocate federal funds.

Mercury System’s competitors include Kratos Defense and Security (NASDAQ:KTOS), Lockheed Martin (NYSE:LMT) , and Textron (NYSE:TXT)

A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Unfortunately, Mercury Systems’s 2.5% annualized revenue growth over the last five years was sluggish. This fell short of our benchmarks and is a rough starting point for our analysis.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Mercury Systems’s recent performance shows its demand has slowed as its revenue was flat over the last two years.

We can better understand the company’s revenue dynamics by analyzing its backlog, or the value of its outstanding orders that have not yet been executed or delivered. Mercury Systems’s backlog reached $1.4 billion in the latest quarter and averaged 4.9% year-on-year growth over the last two years. Because this number is better than its revenue growth, we can see the company accumulated more orders than it could fulfill and deferred revenue to the future. This could imply elevated demand for Mercury Systems’s products and services but raises concerns about capacity constraints.

This quarter, Mercury Systems reported year-on-year revenue growth of 10.2%, and its $225.2 million of revenue exceeded Wall Street’s estimates by 9.5%.

Looking ahead, sell-side analysts expect revenue to grow 3.8% over the next 12 months. Although this projection implies its newer products and services will spur better top-line performance, it is still below the sector average.

Mercury Systems’s high expenses have contributed to an average operating margin of negative 2.2% over the last five years. Unprofitable industrials companies require extra attention because they could get caught swimming naked when the tide goes out. It’s hard to trust that the business can endure a full cycle.

Analyzing the trend in its profitability, Mercury Systems’s operating margin decreased by 7.6 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Mercury Systems’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers.

This quarter, Mercury Systems generated a negative 3.8% operating margin. The company's consistent lack of profits raise a flag.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Sadly for Mercury Systems, its EPS declined by 18.3% annually over the last five years while its revenue grew by 2.5%. This tells us the company became less profitable on a per-share basis as it expanded.

Diving into the nuances of Mercury Systems’s earnings can give us a better understanding of its performance. As we mentioned earlier, Mercury Systems’s operating margin expanded this quarter but declined by 7.6 percentage points over the last five years. Its share count also grew by 7%, meaning the company not only became less efficient with its operating expenses but also diluted its shareholders.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

For Mercury Systems, its two-year annual EPS growth of 27.4% was higher than its five-year trend. This acceleration made it one of the faster-growing industrials companies in recent history.

In Q3, Mercury Systems reported adjusted EPS of $0.26, up from $0.04 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Mercury Systems’s full-year EPS of $0.86 to grow 24.1%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Mercury Systems has shown poor cash profitability over the last five years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 1.6%, lousy for an industrials business.

Taking a step back, an encouraging sign is that Mercury Systems’s margin expanded by 11.1 percentage points during that time. The company’s improvement shows it’s heading in the right direction, and we can see it became a less capital-intensive business because its free cash flow profitability rose while its operating profitability fell.

Mercury Systems burned through $4.37 million of cash in Q3, equivalent to a negative 1.9% margin. The company’s cash burn was similar to its $20.9 million of lost cash in the same quarter last year. These numbers deviate from its longer-term margin, indicating it is a seasonal business that must build up inventory during certain quarters.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Mercury Systems’s five-year average ROIC was negative 0.2%, meaning management lost money while trying to expand the business. Its returns were among the worst in the industrials sector.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Mercury Systems’s ROIC averaged 4.1 percentage point decreases each year. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

Mercury Systems reported $304.7 million of cash and $645.1 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $133.6 million of EBITDA over the last 12 months, we view Mercury Systems’s 2.5× net-debt-to-EBITDA ratio as safe. We also see its $20.23 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

It was good to see Mercury Systems blow past analysts’ revenue, EPS, and EBITDA expectations this quarter. Zooming out, we think this was a good print with some key areas of upside. The stock traded up 5.8% to $80 immediately following the results.

Updated: December 3, 2025 at 10:34 PM EST

Before making an investment decision, investors should account for Mercury Systems’s business fundamentals and valuation in addition to what happened in the latest quarter.

We see the value of companies helping their customers, but in the case of Mercury Systems, we’re out. To kick things off, its revenue growth was weak over the last five years. And while its rising cash profitability gives it more optionality, the downside is its relatively low ROIC suggests management has struggled to find compelling investment opportunities. On top of that, its declining EPS over the last five years makes it a less attractive asset to the public markets.

Mercury Systems’s P/E ratio based on the next 12 months is 68.1x. At this valuation, there’s a lot of good news priced in - we think other companies feature superior fundamentals at the moment.

Wall Street analysts have a consensus one-year price target of $86 on the company (compared to the current share price of $70.34).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.