Mercury Systems: Piper Sandler bullish on ruggedized compute growth

Investing.com -- Piper Sandler has started coverage of Mercury Systems with an Overweight rating and a $126 price target, pointing to autonomy and next-generation defense computing as a new growth vector for the company.

Analyst Clarke Jeffries told investors that Mercury, with more than 40 years in defense electronics, has "built a robust business by converting commercial silicon into secure, ruggedized computing for the Defense sector."

Jeffries noted strong portfolio management under the current CEO and CFO has fueled a roughly 200% run in the shares over the past two years, with recent results indicating "more runaway ahead," including record backlog growth of 18% last quarter.

Piper Sandler described Mercury as a critical supplier of advanced mission systems and a sole-source vendor on more than 300 active defense programs across 25-plus prime contractors.

It tied the company to a secular trend of rising processing requirements in defense, as air, land and sea craft become "less standalone mechanical vehicles and more mobile computing, sensing, communications hubs wrapped in armor."

The analyst adds that autonomous systems and command-and-control initiatives such as CJADC2 should further increase demand.

Looking ahead, Jeffries expects the company to build on record bookings of $348 million, up 74% year over year, and progress toward low-to-mid-20s EBITDA margins and about 50% free cash flow conversion.

After the strong run, he conceded "there is a burden of proof on what the ceiling is for organic growth," which may limit near-term upside, but said climbing organic growth is "a momentum trade we want to be on the right side of."

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