Parsons’s stock price has taken a beating over the past six months, shedding 31.5% of its value and falling to $56.98 per share. This was partly driven by its softer quarterly results and might have investors contemplating their next move.
Is there a buying opportunity in Parsons, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is Parsons Not Exciting?
Despite the more favorable entry price, we're sitting this one out for now. Here are three reasons we avoid PSN and a stock we'd rather own.
1. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Parsons’s revenue to rise by 5.1%, a deceleration versus its 10.2% annualized growth for the past five years. This projection doesn't excite us and suggests its products and services will see some demand headwinds.
2. Weak Operating Margin Could Cause Trouble
Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling those products, and most importantly, keeping them relevant through research and development.
Parsons was profitable over the last five years but held back by its large cost base. Its average operating margin of 5.5% was weak for an industrials business.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Parsons historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 6.8%, somewhat low compared to the best industrials companies that consistently pump out 20%+.
Final Judgment
Parsons isn’t a terrible business, but it doesn’t pass our bar. After the recent drawdown, the stock trades at 17.2× forward P/E (or $56.98 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're pretty confident there are superior stocks to buy right now. We’d recommend looking at the most dominant software business in the world.
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