Mercury Systems, Inc. (MRCY, Financial) is a provider of complex electronic subsystems to major defense contractors. Its devices allow Mercury’s defense contractor customers to develop their products more quickly and at lower risk. Such systems collect, process, store and send information from planes and unmanned aerial vehicles (such as radar and image sensors), provide missile defense for ships and ground based platforms, and are integrated into electronic warfare systems (such as jammers). We believe Mercury is uniquely positioned in its space due to its creation of industry standard open systems and middleware, and a manufacturing scale that few companies other than prime contractors can match. The company has an impressive multi-year backlog, has been steadily improving its operating margins, and has a solid balance sheet that should enable it to make accretive, strategic acquisitions. Shares were up in the quarter as investors grew comfortable that the U.S. defense budget has finally bottomed out, and Mercury reported solid earnings and backlog numbers. This led to a re-rating of the company’s multiple to match major prime contractors in the space. We believe that Mercury deserves a premium multiple as it has the potential to grow at more than double the rate of industry peers, has a large and visible backlog, and in our opinion is an attractive takeout target.
From Baron Discover Fund's fourth quarter 2015 commentary.
