Mercury Systems (MRCY): A Look at What is Possible in 1Q27; Upgrade to OW

Q3 was a key proof point for Mercury, with the company delivering on its target adj EBITDA margin and while that may not continue in each of the remaining quarters of FY27, we certainly do not view 1Q27 as a ceiling. Meanwhile, strong bookings boosted the backlog, providing visibility to support our expectation for double-digit sales growth. And with net leverage set to reach ~0.5x by June 30, mgmt should have more flexibility for cash deployment. As a result of all this, we upgrade MRCY to OW. Sales were 3% above our forecast, but orders were especially strong, bringing backlog to over $2b, which shores up the new sales guide for LDD growth this fiscal year. Bookings were diversified: missiles are among the areas of strength and show up in the other sensor and effector category, where sales were up 33% y/y, while radars and EW also benefit from growing demand. Mercury reached its low-to-mid 20s margin target, and its 35.2% gross margin was the highest since 2Q23, validating the profit