We recently compiled a list of the 11 Worst Aviation Stocks to Buy According to Analysts.In this article, we are going to take a look at where Mercury Systems, Inc. (NASDAQ:MRCY) stands against the other aviation stocks.
The aviation industry has been one of the most important segments of the market in the 20th and 21st centuries. The future of aviation is closely tied to the broader landscape of mobility, which is important for economic growth, social connectivity, and access to services like trade, healthcare, and education.
According to the International Air Transport Association (IATA), the airline industry has made a strong recovery from the COVID-19 crisis, with global traffic surpassing pre-pandemic levels by February 2024. Domestic travel rebounded first, which reached pre-Covid levels by spring 2023, while international travel followed more recently.
However, the global network has shifted since 2019. China’s international travel recovered slowly due to the delayed easing of restrictions, economic uncertainties, and geopolitical issues. On the other hand, domestic travel in China hit record highs, driven by internal tourism. Routes between Asia and Europe continue to be affected by the war in Ukraine.
Most regions are expected to exceed 2019 traffic levels in 2024, with global passenger numbers forecasted to grow 10.4% year-over-year.
The report states that Asia Pacific is the fastest-growing region, which is projected to contribute over half of global passenger growth by 2043 and it is led by India and China. Despite risks like geopolitical conflicts and climate policies, improved economic conditions may boost demand.
Air connectivity, a main driver of global economic growth, is set to hit a record in 2024 with over 22,000 unique city pairs, aided by declining ticket fares. Meanwhile, air cargo demand has rebounded, driven by e-commerce and shipping disruptions. The global capacity is expected to increase further, though the cargo load factor will likely decrease as capacity exceeds demand.
Use of AI in the Industry
Like most industries of today, airlines are also implementing AI to improve the efficiency of their operations. According to an August report by CNBC, these companies are using AI for tasks like ground control, customer service, and optimizing flight routes.
American Airlines introduced its AI-powered "smart gating" system at its Dallas-Fort Worth control center. The tool automatically assigns gates to incoming flights, which cut runway taxi time by around 20%, or two minutes per flight, across five airports. The system also helps passengers, baggage, and crews make quicker connections, which improves overall efficiency.
Alaska is using AI to streamline flight paths and optimize aircraft turnaround times at gates. Its tool is described as "Waze for the skies," and it uses AI to plan faster routes, which saves fuel and reduces delays. Additionally, the system monitors ground operations as it tracks when fuel, catering, and baggage trucks arrive and depart, which allows agents to address delays immediately.
United has implemented generative AI for customer service, especially during flight disruptions. The AI generates detailed, empathetic messages explaining delays, which has increased customer satisfaction by 4% since its rollout on 6,000 flights.
Despite these advancements, the airlines said that AI is not replacing jobs but is improving operational efficiency. AI tools allow airlines to improve areas where humans may struggle to handle complex tasks as efficiently. These things, like reducing flight delays or cutting minutes off turnaround times, aim to improve overall service without completely automating operations.
Our Methodology
For this article, we used stock screeners and ETFs to identify 65 companies above $50 million market cap that have significant operations in the aviation industry. We narrowed our list to 11 companies where less than 50% of the analysts that have covered the stock have Buy-equivalent ratings. In addition, we skipped stocks with an average analyst price target upside above 15%. The stocks are listed in descending order of their average analyst price target upside.
We also added the hedge fund sentiment around each stock which was taken from our database of over 900 elite hedge funds. Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A satellite in orbit, capturing the technological prowess of the aerospace & defense company.
Average Analyst Price Target Upside as of September 16: -11.95%
Number of Hedge Fund Holders: 19
Mercury Systems, Inc. (NASDAQ:MRCY) is a technology company specializing in the development and provision of advanced components and subsystems for defense and aerospace applications. Serving a wide range of clients, including defense prime contractors, the U.S. government, and commercial aerospace companies, it operates across the U.S., Europe, and the Asia Pacific.
The company’s products are integral to around 300 programs with 25 major defense and aviation customers. Out of 9 analysts’ coverage, Mercury Systems (NASDAQ:MRCY) has 4 Hold ratings and 2 Sell ratings. As of September 16, the average price target of $33.00 has a downside of 11.95% to the stock’s current price.
Mercury Systems (NASDAQ:MRCY) was part of 19 hedge funds’ portfolios in the second quarter with a total stake value of $341.752 million. JANA Partners is the most prominent shareholder in the company and has a position worth $186.9 million, as of June 30.
In the fourth quarter of fiscal 2024, the company reported revenue of $248.6 million, a decline from the $253 million recorded in the same quarter of the previous year. The company's GAAP net loss for the quarter was $10.8 million, or $0.19 per share, compared to a net loss of $8.2 million, or $0.15 per share, in the fourth quarter of fiscal 2023.
For the full fiscal year 2024, revenues totaled $835.3 million, a decrease from $973.9 million in fiscal 2023. Adjusted EBITDA also dropped significantly to $9.4 million for the year, compared to $132.3 million the previous year.
Consequently, on September 5, JPMorgan analyst Seth Seifman raised the price target on the stock to $36 from $26 but maintained a Neutral rating.
However, Mercury Systems (NASDAQ:MRCY) is taking steps to improve its financial situation. The company secured a $13.2 million contract with the U.S. Navy in July 2024. The agreement involves developing a next-generation RF System-in-Package (SiP) designed to enhance sensor processing technologies. The new system will accelerate the development of radar and electronic warfare capabilities, which could significantly benefit the company’s future prospects.
Overall MRCY ranks 2nd on our list of the worst aviation stocks to buy. While we acknowledge the potential of MRCY as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than MRCY but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
