Defense contractors have had a rough go of it in 2012, mainly on the possible impacts generated from any inability to avoid the "Fiscal Cliff" which will mandate some $50B a year in cuts to the overall defense budget. Mercury Computer Systems (NASDAQ:MRCY) has been one of many firms that has been punished (unfairly in my opinion) by the market over these concerns. For investors with a longer term perspective, the stock is currently offering an attractive entry point.
"Mercury Computer Systems designs, manufactures, and markets high-performance embedded, real-time digital signal and image processing systems and software for specialized defense and commercial computing markets." (Business description from Yahoo Finance).
Seven reasons MRCY is a solid long term play at under $10 a share:
- The company has a robust balance sheet with over $115mm in net cash on its books (40% of market capitalization).
- The median price target on the stock by the six analysts that cover the stock is $15.50, more than 50% above its current price.
- The stock is selling near the bottom of its five year valuation based on P/E, P/B and P/CF.
- The company's earnings are going to be down to a projected 46 cents a share this from 79 cents a share in FY2011. However, analysts expect the firm to make almost a dollar a share in FY2013.
- Earnings might be down this year, but revenues are expected to increase by double digits this year and almost 20% in FY2013. The stock has a projected five year PEG of under 1 (.87) as well.
- Importantly, its defense business is centered around intelligence, reconnaissance and surveillance. These subsectors of the defense budget should be less affected by any defense budget cuts than big ticket items.
- The stock is too cheap at just over 10 times forward earnings given its projected growth rate and cash on the books.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in MRCY over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.