Parsons (PSN)

Infrastructure and defense services provider Parsons (NYSE:PSN) fell short of the market’s revenue expectations in Q1 CY2025 as sales only rose 1.2% year on year to $1.55 billion. On the other hand, the company’s full-year revenue guidance of $7.25 billion at the midpoint came in 1.3% above analysts’ estimates. Its non-GAAP profit of $0.78 per share was 5.1% above analysts’ consensus estimates.

Company Overview

Delivering aerospace technology during the Cold War-era, Parsons (NYSE:PSN) offers engineering, construction, and cybersecurity solutions for the infrastructure and defense sectors.

Defense contractors typically require technical expertise and government clearance. Companies in this sector can also enjoy long-term contracts with government bodies, leading to more predictable revenues. Combined, these factors create high barriers to entry and can lead to limited competition. Lately, geopolitical tensions–whether it be Russia’s invasion of Ukraine or China’s aggression towards Taiwan–highlight the need for defense spending. On the other hand, demand for these products can ebb and flow with defense budgets and even who is president, as different administrations can have vastly different ideas of how to allocate federal funds.

Competitors in the Government and commercial technology industry include Jacobs Solutions (NYSE:J), KBR (NYSE:KBR), and SAIC (NYSE:SAIC).

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Luckily, Parsons’s sales grew at an impressive 11% compounded annual growth rate over the last five years. Its growth beat the average industrials company and shows its offerings resonate with customers, a helpful starting point for our analysis.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Parsons’s annualized revenue growth of 23.8% over the last two years is above its five-year trend, suggesting its demand was strong and recently accelerated.

Parsons also reports its backlog, or the value of its outstanding orders that have not yet been executed or delivered. Parsons’s backlog reached $9.1 billion in the latest quarter and averaged 3.9% year-on-year growth over the last two years. Because this number is lower than its revenue growth, we can see the company fulfilled orders at a faster rate than it added new orders to the backlog. This implies Parsons was operating efficiently but raises questions about the health of its sales pipeline.

This quarter, Parsons’s revenue grew by 1.2% year on year to $1.55 billion, falling short of Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 6.6% over the next 12 months, a deceleration versus the last two years. This projection doesn't excite us and implies its products and services will face some demand challenges. At least the company is tracking well in other measures of financial health.

Parsons was profitable over the last five years but held back by its large cost base. Its average operating margin of 5.3% was weak for an industrials business.

On the plus side, Parsons’s operating margin rose by 1.7 percentage points over the last five years, as its sales growth gave it operating leverage.

This quarter, Parsons generated an operating profit margin of 7%, in line with the same quarter last year. This indicates the company’s overall cost structure has been relatively stable.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Parsons’s EPS grew at a remarkable 13.7% compounded annual growth rate over the last five years, higher than its 11% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

We can take a deeper look into Parsons’s earnings quality to better understand the drivers of its performance. As we mentioned earlier, Parsons’s operating margin was flat this quarter but expanded by 1.7 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its higher earnings; taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.

Like with revenue, we analyze EPS over a more recent period because it can provide insight into an emerging theme or development for the business.

For Parsons, its two-year annual EPS growth of 35% was higher than its five-year trend. We love it when earnings growth accelerates, especially when it accelerates off an already high base.

In Q1, Parsons reported EPS at $0.78, up from $0.70 in the same quarter last year. This print beat analysts’ estimates by 5.1%. Over the next 12 months, Wall Street expects Parsons’s full-year EPS of $3.35 to grow 12.1%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Parsons has shown decent cash profitability, giving it some flexibility to reinvest or return capital to investors. The company’s free cash flow margin averaged 6.5% over the last five years, slightly better than the broader industrials sector.

Taking a step back, we can see that Parsons’s margin was unchanged during that time, showing its long-term free cash flow profile is stable.

Parsons burned through $25.26 million of cash in Q1, equivalent to a negative 1.6% margin. The company’s cash burn slowed from $72.86 million of lost cash in the same quarter last year. These numbers deviate from its longer-term margin, but we wouldn’t put too much weight on the short term because investment needs can be seasonal, causing temporary swings.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Although Parsons has shown solid business quality lately, it historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 6.1%, somewhat low compared to the best industrials companies that consistently pump out 20%+.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Fortunately, Parsons’s ROIC averaged 3.2 percentage point increases over the last few years. its rising ROIC is a good sign and could suggest its competitive advantage or profitable growth opportunities are expanding.

Parsons reported $269.7 million of cash and $1.38 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $612.6 million of EBITDA over the last 12 months, we view Parsons’s 1.8× net-debt-to-EBITDA ratio as safe. We also see its $18.2 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We enjoyed seeing Parsons beat analysts’ EBITDA expectations this quarter. We were also glad its full-year revenue guidance slightly exceeded Wall Street’s estimates. On the other hand, its revenue missed and its backlog fell slightly short of Wall Street’s estimates. Zooming out, we think this was a decent quarter featuring some areas of strength but also some blemishes. The stock traded up 2.3% to $70.25 immediately following the results.

Updated: May 16, 2025 at 11:01 PM EDT

Are you wondering whether to buy Parsons or pass? We urge investors to not only consider the latest earnings results but also longer-term business quality and valuation as well.

There’s plenty to admire about Parsons. To kick things off, its revenue growth was impressive over the last five years. And while its relatively low ROIC suggests management has struggled to find compelling investment opportunities, its remarkable EPS growth over the last five years shows its profits are trickling down to shareholders. On top of that, its projected EPS for the next year implies the company will continue generating shareholder value.

Parsons’s P/E ratio based on the next 12 months is 18.3x. Looking at the industrials landscape right now, Parsons trades at a pretty interesting price. If you believe in the company and its growth potential, now is an opportune time to buy shares.

Wall Street analysts have a consensus one-year price target of $80.23 on the company (compared to the current share price of $68.54), implying they see 17.1% upside in buying Parsons in the short term.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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