Take a SWOT at Mercury Systems

Maxxwell A.R. is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

It is easy to get overwhelmed when researching a potential investment. What is the noise? What really matters to the long term prospects of an investment? Remember, when you buy shares in a company you own a piece of that company – not just a three to five-letter ticker on the other end of your login page. A great way to organize your research is to perform a SWOT analysis. Today we take a look at Big Data process system developer Mercury Systems (NASDAQ: MRCY).

Strengths

  1. Experience. Founded in 1981, Mercury Systems has contributed to over 300 projects with various commercial, defense, and intelligence entities. Several high profile projects include SEWIP, AEGIS, Patriot, and Predator/Reaper. Perhaps you have heard?
  2. Candy store system design. The company offers an all-in-one or subsystem approach to customer problems. Whether they require everything from acquisition to distribution or just a single step in the process, Mercury has a solution.
  3. Open designs. While certain military projects are obviously kept under wraps, many companies seek software and hardware solutions to their application-specific problems. Mercury exposes itself to a much broader customer base by offering open, customizable systems designed to make the experience of the customer and end-user as smooth as possible.
  4. Do you really want to mess with this thing?

And you thought the Honey Badger was tough?  Source: www.unmanned.co.uk

Weaknesses

  1. Uncle Sam dependency. All of the company’s business segments report revenue tied to government-funded projects. We’ve all witnessed the revenue over dependency story end badly before…
  2. Big Storage is lacking. If you can’t store all the data your real-time system encounters, then you must discard potentially critical information. Storage systems get larger every year, but there is still a tradeoff between size/portability and storage capacity. For example, the Large Synoptic Survey Telescope (LSST) in Chile will require 15 petabytes – that’s 15,728,640 GB – of storage per year.
  3. Operating expenses. Take one look at the income statement of any digital signal processing company and you’ll notice that it’s pretty expensive to do business. With so much revenue tied to the government, one hiccup could be a big headache for investors.

Opportunities

  1. Military Industrial Complex. In 2012, the U.S. spent more on defense ($711 billion) than the next 14 countries combined ($710.9 billion).
  2. Modernization of war. The development of an urban, technology-based war machine feeds the growth of Big Data, which far outpaces the growth in processing systems needed to interpret it. Mercury provides a suite of solutions, such as its Ensemble 6000 Series OpenVPX GSC6200 GPU Processing Module built on best-in-class NVIDIA GPUs.
  3. Disclosure: Panetta is long Big Data. In his strategic review of national defense, U.S. Secretary of Defense Leon Panetta called for increased investment in information processing, exploitation, and dissemination technologies – all of which are streamlined by the company.
  4. Commercialization of drones. Like it or not, drones will soon be coming to a neighborhood near you to solve local Big Data bottlenecks. Drone designs and applications may differ, but standard processing systems will need to emerge if the industry is going to take off. Who better to capitalize than Mercury?

Threats

  1. Quickly changing market. The field of competitors is large in any new high-growth industry, but it usually gets narrowed down pretty quickly. It is estimated that over 600 companies will compete in the Big Data space by 2017. Not all will compete on the same turf as Mercury, but can it lead the pack in commercial development of processing systems?
  2. Open source drones. With so many possible applications for commercial drones, an open-source environment would be very adaptable and efficient for users. While Mercury can certainly compete on quality, will it be able to compete with lower-cost open-source disrupters?
  3. Changing data types. In the past, data were mostly large arrays with neatly organized rows and columns. Now more and more data are massive binary objects and images that require more processing just to figure out what information is actually present. Translation for people who can’t do math: Math just became EVEN HARDER.

Foolish bottom line

The defense industry has seen mixed results heading towards the fiscal cliff. Given their importance, it would seem that Big Data processing technologies would fly under the radar (after amplifying the signal, processing it, and sending in a predator drone for a preemptive strike, of course) of future Congressional cuts. However, Mercury has steadily slid after a rare net loss in 1Q13 (latest earnings) due to uncertainty surrounding military spending cuts.

Meanwhile, competitor Kratos Defense & Security Solutions (NASDAQ: KTOS) trimmed losses 36% YOY in its most recent quarter. The company, which focuses more heavily on software and IT solutions than Mercury, has only turned a profit once since 2007 – the opposite result of Mercury. Both companies may be trading at a discount to book value, but Mercury has a much healthier balance sheet (0% debt-to-assets compared to 48% for Kratos) and is better equipped to capitalize on shifting military focus.

If you’re looking forward to pizza delivery drones, then you may want to add Mercury to your watchlist.

Follow @drunkenpredator for all your UAV news. You won’t be disappointed.

Follow me on Twitter to keep up with my future posts on energy, sustainable chemicals, and undervalued growth companies @BlacknGoldFool.

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