Reporting fourth-quarter 2026 financial results yesterday after the bell rang, Mercury Systems (MRCY -5.34%) gave investors plenty to celebrate. In addition to beating analysts' revenue expectations, the aerospace and defense company set several records during the quarter. Investors, however, are uninterested, focusing on another cause for concern instead.
As of 11:30 a.m. ET, shares of Mercury Systems are down 6.4%.
Image source: Getty Images.
Margin contraction is sufficient fodder for the bears
Coming up just shy of the adjusted earnings per share (EPS) of $0.38 that analysts expected, Mercury Systems reported adjusted EPS of $0.37, a decline from the $0.47 that it reported during the same period last year.
NASDAQ: MRCY
Key Data Points
Besides the Mercury's declining profit, investors are balking at the company's narrower margins. In Q4 2026, Mercury's operating margin contracted to 5% from 8.6% during the same period in 2025. Similarly, Mercury reported a slimmer profit margin in the last quarter of fiscal 2026, at 0.3%, compared with 8.6% in Q4 2025.
Booking Q4 2026 revenue of $289.8 million, Mercury Systems set a new company quarterly sales record and blew past the $266.4 million that analysts anticipated. The company also succeeded in expanding its backlog to $1.9 billion as of July 3, about $540 million higher than where it was a year ago.
Does the current sell-off provide a buying opportunity?
While Mercury's growth in both sales and backlog is encouraging, investors are clearly concerned about the waning profitability. Add this to the fact that shares are trading at a steep valuation -- 70 times forward earnings -- and it's clear why investors feel that Mercury stock is too hot to handle right now. At this point, investors should watch Mercury from the sidelines and look for the company to make better progress toward converting its growing revenue into profits. In the meantime, there are plenty of other aerospace stocks to consider.
