Mercury Systems (NASDAQ:MRCY) MRCY on Monday announced that it has completed the previously-announced acquisition of the Florida-based avionics maker, Avalex Technologies Corporation.
Both companies entered into a definitive agreement in late September, wherein Mercury Systems agreed to buy Avalex for cash. The aerospace and defense technology company has funded the acquisition through a combination of available cash and an existing revolving credit facility. However, the company didn’t disclose the actual consideration amount for the transaction.
Founded in 1992, Avalex is a global leader in designing innovative mission-critical avionic and electronics solutions for the aviation and aerospace industry. It specializes in manufacturing rugged avionics, which includes digital mapping systems, cockpit pressure oxygen warning systems, cockpit management units, digital video recorders, mission computers and tablets.
Rationale Behind the Buyout
The buyout will be a strategic fit for the company, as Avalex’s product portfolio complements Mercury Systems' existing product portfolio. The integration of Avalex will strengthen its mission-processing capabilities and display offering.
Moreover, the addition of innovative offerings like integrated smart displays and communication-management solutions to Mercury Systems' existing portfolio will reinforce its position in the global avionics business.
The buyout is anticipated to be immediately accretive to Mercury Systems’ adjusted earnings per share. Avalex is projected to generate revenues of $40 million, with adjusted EBITDA margins of almost 25% by December next year.
Acquisitions: A Key Growth Driver
Mercury Systems has a history of expanding through acquisitions. These buyouts have added significant value to the company and expanded its total addressable market. Since 2014, it has completed 14 acquisitions.
In the first quarter of fiscal 2022, the company reported acquired revenues (18.3% of total revenues) of $41.3 million, primarily attributable to the acquisitions of Physical Optics Corporation and Pentek. We believe these continued acquisitions will fuel the company’s growth ahead.
Mercury Systems' domain expertise in analog and digital integration has helped it build a solid business relationship with defense prime contractors for a long time. Modernization in radar, electronic warfare and C4I is high, providing the company with new opportunities in weapon systems, space, avionics processing and mission computing, and embedded-rugged services.
Also, the fast-growing usage of parallel processing and high performance computing is prompting companies like Mercury Systems to leverage artificial intelligence to solve real-world problems across industries.
However, pandemic-related modernization delays and customer execution issues are likely to continue impacting the company’s revenue growth in the near term. Though Mercury Systems has been steadily winning federal contracts, these low-margin deals are likely to affect its profitability in the long run.
Zacks Rank & Stocks to Consider
Mercury Systems currently carries a Zacks Rank #3 (Hold).
Better-ranked stocks in the broader technology sector include Applied Materials (NASDAQ:AMAT) AMAT, Broadcom (NASDAQ:AVGO) AVGO and Perficient (NASDAQ:PRFT) PRFT, all currently carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The long-term earnings growth rate for Applied Materials, Broadcom and Perficient is currently pegged at 19.4%, 15% and 18%, respectively.
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