Parsons Corporation

Moat: 3/5

Understandability: 4/5

Balance Sheet Health: 4/5

Parsons is a leading provider of technology solutions, specifically for critical infrastructure and national security, offering services across various stages of project delivery and also software and hardware solutions.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Parsons Corporation, a prominent player in the infrastructure and national security sectors, operates as a technology-driven solutions provider, not a manufacturer. The company’s core business centers around designing, engineering, and managing complex projects globally, particularly for the US government and other governmental entities.

Business Overview:

Revenue Distribution: Parsons divides its operations into two major segments: Federal Solutions and Critical Infrastructure. The Federal Solutions segment contributes approximately 55% to 60% of total revenue, focusing on cybersecurity, defense, space exploration, and other related fields for the U.S. government. The Critical Infrastructure segment accounts for the remaining 40%-45% of revenue, providing engineering and management services for complex physical and digital infrastructure around the globe.
Industry Trends: The industries in which Parsons operates are experiencing significant tailwinds. Government spending on defense, cybersecurity, and infrastructure is on the rise, creating a favorable environment for Parsons. The demand for sustainable and resilient infrastructure, advanced technology for national security, and cybersecurity solutions is expected to grow.
Margins: Although the company’s margins are not the highest, they are stable and improving. Gross margins for Federal Solutions were 23.8% in the last quarter, down slightly from the 24.8% recorded in the previous quarter. The Critical Infrastructure operating margins increased from 6.0% in the year ended 2022 to 7.1% for the nine months ended in 2023.
Competitive Landscape: Parsons faces competition from a diverse range of companies, including large engineering firms, technology providers, and specialized contractors. Although the company faces fierce competition, the highly technical nature of their solutions, combined with a strong reputation in the government sector, gives them a solid competitive edge.

A key differentiator is their expertise in technology-based solutions. Parsons leverages innovative technologies like AI, cybersecurity, and machine learning across multiple projects.

Financials in Detail:

Recent Quarterly Performance: In Q3 2024, Parsons reported revenue of $1.2 billion, which was 17% higher than the same quarter in 2023. Adj. EBITDA grew by 15% to $105 million with margins of 8.6%, which is also impressive. There was significant growth in the Defense and Intelligence sectors, leading to 25.9% growth in revenue there compared with the last year. This suggests that their core business is healthy and growing.
Revenue Trends: As mentioned above, Parsons’ has two segments. Their revenues have been growing recently, driven by increased government spending and contract wins. They are particularly seeing robust growth in the Federal Solutions segment.
Profitability: The company demonstrates a positive trend in profitability metrics. The Adjusted EBITDA margin for the whole company is about 8%, but a little lower at 7.7% on a trailing 12 months basis and the company wants this number to increase with better projects and the growth of their high-margin software businesses.
Cash Flow: Free cash flow was $229 million in the first 9 months of 2023 and they have a cash balance of $192 million as of the end of the quarter in 2024. As per management’s guidance, the company is targeting a free cash flow of $270 million for 2024 and 400 million for 2025 which is a healthy cash flow which gives them financial flexibility for expansions, acquisitions and other plans.
Balance Sheet: Parsons has a solid balance sheet as of the last report. The company has $1.27 billion in total debt and $2.42 billion in equity. They have a Debt-to-Equity ratio of 0.53 and a leverage of 1.2, which suggests the company is not over-leveraged and has good financial stability. Moreover, their debt maturities are manageable and they have decent coverage ratios.

Even though revenues and profits are growing, there is a significant amount of goodwill in the balance sheet because of their recent acquisitions, this goodwill is being tested and has seen minor impairments.

Capital Structure: Parsons’ debt-to-equity ratio of 0.53 indicates a balanced use of debt, which is not only a positive for financial health but also gives them opportunities to utilize debt for growth.

Moat Assessment:

Parsons possesses a moderate economic moat, primarily derived from:

Intangible assets: Parsons possesses several certifications, clearances, and a large number of clients in the U.S government that creates high switching costs. They also have their own AI software that creates a more complex offering.
Switching Costs: Parsons has long-term contracts that creates switching costs for clients. Also, their highly customized and integrated solutions make customers hesitant to switch to a competitor, thus locking in revenue.

Rating: 3 / 5. *While they have some elements of a moat, the competition is fierce and not a pure monopoly. They rely heavily on government contracts, which are tied to political and budgetary cycles.

Risks to the Moat and Business Resilience:

Government Spending: The heavy reliance on government contracts makes them vulnerable to changes in government funding and policies. This dependence could result in budget cuts or changes in procurement processes.
Competition: The industries they operate in are highly competitive and they could lose market share to a more innovative and lower price competitor. Their pricing power is not particularly high and they can’t extract any significant margins from customers, but they are able to maintain their profitability with cost-cutting measures.
Acquisition Risk: Since 2020, Parsons has aggressively expanded through acquisitions and there may be some risk in realizing the expected synergies and return on capital. Management has to be very careful in integrating different companies into the business and maintaining the corporate culture.
Technological disruption: The threat of technological disruption is not high right now. However, because they operate in high tech areas, there is always a risk of newer technologies superseding the ones Parsons is currently using.

Understandability Rating: 4/5

Parsons is a complex business but easy to understand to some extent. As a technology and service provider that primarily contracts with governments, the core business is not overly difficult to grasp, although the nature of the projects may be very complex. However, they have a pretty diversified business. It is complex to fully understand their financials because of various projects and subsidiaries, but overall the business is not too complicated to understand.

Balance Sheet Health Rating: 4 / 5

Parsons has a healthy balance sheet, but there is a significant increase in debt over the last year with their acquisitions. While the debt is not excessive right now, this should still be monitored. Their free cash flow is healthy. So, the balance sheet is good, but they should also keep a close watch on their leverage.

Recent Concerns/Controversies and Management’s Thoughts:

Share Repurchases: In a recent earning calls management has noted that they intend to repurchase more shares in the near future and reduce the dilution caused by the stock options.
Acquisition Integration: In the earnings calls and interviews, the management team emphasized their smooth integration of recent acquisitions like BlackHorse, that helped boost revenues. However, they have also stressed that they need to be very careful in their selection of acquisitions to properly allocate capital.