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Lockheed, Raytheon Outsourcing Should Help This Defense Firm

Mercury Systems (MRCY) is likely to gain from big defense industry contractors outsourcing more subsystem work, Citigroup said Monday as it hiked its price target on the company.

“Defense primes currently outsource over 10% of the $35 billion electronics subsystems work done each year,” said Jason Gursky, a Citigroup analyst. “However, we expect this penetration rate to grow due to pressure to more rapidly design, develop and deliver affordable solutions to the Department of Defense.”

President Trump has proposed budget cuts in other agencies in order to increase military spending, an action that could lift all boats in the defense sector. IBD’s Aerospace-Defense group, which includes defense contractors, is ranked No. 32 out of 197 industry groups, up from No. 78 four weeks ago.

Further, Mercury is ranked No. 7 in the IBD 50, a roster of fast-growing stocks. Defense giants Lockheed Martin (LMT) and Raytheon (RTN) are big Mercury customers, and its products are used by more than 25 prime defense contractors, including Boeing (BA) and General Dynamics (GD).

“Even though we think most of the near-term incremental spending from Trump will flow to readiness accounts rather than more procurement, Mercury’s solutions help upgrade aging platforms,” said Gursky in the report.

Gursky hiked his priced target on shares of Chelmsford, Mass.-based Mercury to 48 from 45. Mercury stock moved up nearly 1% to 40.16 in the stock market today, and is up 32% thus far this year.

IBD’S TAKE: Which companies are hitting 52-week highs? That’s easy to find at IBD’s New Highs, but that list goes one big step better. That is, it ranks the companies making new highs by Composite Rating. So the best are at the top, making this a quick and easy read to find stocks for your watch list.

“As more programs move to open systems architecture, the defense prime contractor community is moving toward procurement of integrated subsystems that enable them to port advanced applications onto available state-of-the-art architectures and affordable upgrade electronics on aging military platforms,” Gursky said.

He added: “We believe these trends create a good opportunity for Mercury to grow organic sales at a high-single-digit rate over the next few years.”

Gursky’s action follows that of JP Morgan, which in early March initiated Mercury Systems at overweight with a price target of 48.


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Article source: http://www.investors.com/news/technology/mercury-systems-seen-gaining-from-lockheed-raytheon-outsourcing/

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