What happened

Aerospace tech company Mercury Systems' (MRCY -0.47%) quarterly results slightly exceeded expectations, but its guidance was weak. That guidance has the shares tumbling more than 20% in Wednesday morning trading.

So what

On Tuesday after markets closed, Mercury reported fiscal third-quarter adjusted earnings of $0.64 per share on revenue of $256.86 million, topping analyst expectations of $0.62 per share in earnings on revenue of $253 million. The company makes components for a variety of commercial aerospace and defense platforms, for example rugged ethernet routing devices used by Boeing in the AH-64E Apache helicopter.

Aerial view of the Pentagon.

Image source: Getty Images.

"The company delivered a strong financial performance in the third quarter," CEO Mark Aslett said in a statement. "We continue to execute on our strategy to deliver strong margins while growing the business organically and supplementing the organic growth with disciplined M&A and full integration. Our pipeline is robust with multiple opportunities of varying sizes, all in line with the core of our strategy."

Unfortunately, the company is not as optimistic about the fiscal fourth quarter as Wall Street analysts were. Mercury sees fourth-quarter adjusted earnings coming in at between $0.66 and $0.69 per share, below the $0.73-per-share consensus.

The forecast prompted Canaccord Genuity analyst Ken Herbert to downgrade Mercury to a hold from a buy, although his $74 price target offers more than 35% upside over current prices. Herbert in a note said that Mercury's caution about future growth, coupled with investor concerns over slowing Pentagon spending, limits the near-term upside to the shares.

Now what

This is a good business, and management is confident about the long-term future. The problem is that there isn't a lot of certainty about the near term or how quickly Mercury can capitalize on its potential. Mercury isn't cheap for a defense contractor, trading at 52 times earnings and nearly five times sales. Herbert is likely right that the near term could be difficult until there is more clarity about Pentagon spending plans.