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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:
 

  1. The company has a robust balance sheet with over $115mm in net cash on its books (40% of market capitalization).
  2. 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.
  3. The stock is selling near the bottom of its five year valuation based on P/E, P/B and P/CF.
  4. 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.
  5. 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.
  6. 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.
  7. 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.

Source: This Cash Rich $10 Defense Stock Is Oversold