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In the fall of 2023, I believed that the year was working out so far in the case of Parsons (NYSE:PSN). The technology-driven defense and infrastructure business saw solid sales and earnings growth, with bolt-on acquisitions aiding growth and adding to the backlog.
Forwarding nearly a year in time, Parsons has seen a big year so far, with accelerating operating momentum being outright impressive. Unfortunately, valuation expectations have risen substantially as well, a bit too much for me to see appeal here, although I am very impressed with organic growth.
Technology-Driven Solutions – For Defense, Intelligence And Infrastructure
The paragraph header is in essence what Parsons is about, helping clients to design, engineer, service and provide software to keep the world smart, connected and safe.
The company went public at $27 per share back in 2019, at the time being a $4 billion business which posted relatively low GAAP earnings of $120 million. With revenues stagnating during the pandemic at $3.9 billion, the company reported a huge backlog of more than twice the revenue number.
Revenues fell back to $3.7 billion in 2021, as the 2022 outlook (which called for $3.8 billion in sales) revealed that sales would be flat for quite a few years in time. This period of stagnation ended in 2022 as the conflict between Russia and Ukraine broke out, as the company started to pursue some acquisitions as well.
A $40-$50 share at the time was anticipating some good news, with earnings power (adjusted) posted at just over $2 per share. In the end, 2022 sales grew 15% to $4.2 billion (driven by the acquisition of Xator) with adjusted earnings reported at $1.81 per share.
The company called for 2023 sales just shy of $4.5 billion, seeing EBITDA up some ten percent. With momentum accelerating, the company hiked the full year sales guidance to nearly $5 billion halfway through the year, as momentum was seen, with earnings running around $2.25 per share, as more bolt-on deals and contract awards were announced. Trading around $50 per share, I saw appeal emerging, but being fearful about fewer acquisition possibilities, I was leaning a bit cautious, too cautious with the benefit of hindsight.
A Home Run
A $60 stock at the start of this year has continued to see momentum, with shares trading at an all-time-high of $94 per share here. A substantial part of these gains came in the final days of July, when shares jumped higher following a decent earnings report.
The year started solid in February as the company posted a 30% increase in 2023 sales to $5.4 billion, with organic growth responsible for 23% of this growth. The only disappointing factor from the topline point of view was a mere 5% increase in the backlog to $8.6 billion.
The company posted adjusted EBITDA of $465 million. GAAP earnings came in at $161 million, equal to $1.42 per share, but net earnings were hampered by a big loss at unconsolidated joint ventures. Adjusted for these and some others (but not stock-based compensation expenses) I arrive at adjusted earnings of around $222 million. This works down to earnings of around $2.10 per share, all while net debt was reported close at par to the EBITDA number.
Moreover, the company provided a solid guidance for the coming year, with sales seen at up to $5.8-$6.0 billion, and EBITDA seen around a midpoint of $525 million. The incremental improvement in EBITDA is seen around $60 million in dollar terms, or just over half a dollar on a pre-tax basis, creating a roadmap for earnings to advance towards $2.50 per share.
It was clear that the company was setting itself up for acquisition activity as the company priced $800 million in convertible notes in February. While the coupon was pretty reasonable at 2.625% these bond carried conversion prices around $94 per share which is frankly where shares are trading today.
In May, the company posted a 31% increase in first quarter sales to $1.5 billion, almost entirely driven by organic growth, with the backlog up 8% to $9.0 billion after the company posted a book-to-bill ratio of 1.4 times for the quarter. The company convincingly hiked the sales guidance to $6.1-$6.4 billion, up $300-$400 million, with EBITDA guidance hiked by $30 million to $555 million. Following this earnings report, shares rallied towards the $80 mark, as new momentum was unleashed by the end of July.
Toward the end of the month, Parsons announced a $200 million acquisition of BlackSignal Technologies. The company develops next-generation digital signal processing, electronic warfare and cybersecurity services. The deal will add $95 million in annual sales by 2025, suggesting that just over a 2 times sales multiple has been paid, with the transaction valued at 10.5 times EBITDA, with the EBITDA contribution pegged at $19 million, as the business posts margins around 20%.
Another Blowout Quarter
On the final day of July, Parsons reported a 23% increase in second quarter sales to $1.7 billion, with organic growth responsible for 22% of the sales growth. The company hiked the full year sales guidance again, now seeing sales at $6.35-$6.55 billion, with EBITDA seen at a midpoint of $575 million.
Net debt levels rose to $719 million, mostly amidst investments in JV’s and costs associated with the (re)financing actions. With 106 million shares trading at $94, the company commands a $10 billion equity valuation, for a $10.7 billion enterprise valuation. Based on the revised guidance, the company trades at 1.7 times sales and around 19 times EBITDA, all of which makes the BlackSignal deal look relatively attractive.
After six months, the company posted adjusted earnings of $1.53 per share, which includes an adjustment of around $0.20 per share for stock-based compensation expenses, for what I believe to be realistic earnings close to $1.33 per share. With the guidance calling for a similar performance in the second half of the year, I peg realistic earnings around $2.60-$2.70 per share here, which has pushed up realistic earnings to around 35 times earnings here.
In the meantime, pro forma net debt is seen around $900 million, for a leverage ratio of around 1.5 times, but overall, these remain very demanding valuation multiples, as the move in the share price has been rather pronounced.
Concluding Remark
The truth is that I am extremely impressed with the near 30% earnings growth reported this year so far, as Parsons has been on fire in terms of operating excellence. Moreover, the company makes continued bolt-on deals which look reasonable, as the same applies for leverage, pro forma the latest deal.
All in all, I am impressed as a stagnating business has been ignited, but unfortunately the same applies to the valuation, as a 35 times earnings multiple here feels too demanding to see a reasonable risk-reward proposition.
