On Thursday, Raymond (NS:RYMD) James made a significant change to its outlook on Parsons Corp . (NYSE:NYSE:PSN), downgrading the company's stock rating from Outperform to Market Perform. The decision by analyst is based on several factors affecting the company's future growth prospects.
According to InvestingPro data, Parsons maintains a "GOOD" overall financial health score, with particularly strong metrics in growth and cash flow management.Want deeper insights? InvestingPro's comprehensive analysis reveals 12 additional key factors that could impact PSN's performance, available in the detailed Pro Research Report.
The analyst noted that the downgrade reflects a complex scenario where slowing growth and challenging comparisons (comps) are weighed against the advantages of strong management and favorable market conditions. Despite Parsons' impressive year-to-date stock performance, which saw a 48% return compared to the industry average of 12%, concerns have been raised regarding the sustainability of this growth. Recent InvestingPro data shows revenue growth of 29% in the last twelve months, with a healthy gross profit margin of 21.6%.
The analyst pointed out that Parsons' growth is expected to decelerate to 8% in 2025, a significant drop from the 18% average growth rate over the past three years. Market expectations, or "whisper numbers," are speculated to be in the double digits, which may prove difficult to meet given the tougher comps ahead. However, InvestingPro data indicates that six analysts have recently revised their earnings expectations upward for the upcoming period, with analyst price targets ranging from $110 to $130.
Additionally, Raymond James highlighted a slowdown in backlog growth, a critical indicator of future revenue potential. Over the last two quarters, backlog growth has decreased by 1%, a stark contrast to the 3% average growth previously observed. This deceleration is seen as a potential risk to the company's performance moving forward.
The analyst also referenced the company's valuation, which at 16.4 times earnings, stands 4 times higher than the group average. Current InvestingPro metrics show a P/E ratio of 124.47 and a Price/Book ratio of 4.24, indicating a premium valuation. This premium valuation amidst slowing growth and backlog concerns contributed to the decision to adjust the stock's rating. Based on InvestingPro's Fair Value analysis, the stock appears to be trading near its fair value.
In summary, while Parsons has been recognized for its strong management and solid revenue mix, along with benefiting from robust infrastructure tailwinds, Raymond James has identified several factors that could potentially hinder the company's stock performance in the near future. The downgrade to Market Perform reflects a cautious stance on the company's ability to maintain its previous growth trajectory.
In other recent news, Parsons Corporation has been making significant strides in the infrastructure and transportation sectors. The corporation has joined the Austin Light Rail project as a key partner, a collaboration that analysts forecast will have a substantial impact on Austin's urban development. In addition, Parsons has secured a $23 million contract with Caltrans, further solidifying its position in the transportation sector.
Moreover, Parsons, in partnership with Tutor Perini (NYSE:TPC) Corporation and O&G Industries, has been awarded a $1.18 billion contract for the replacement of the existing AirTrain system at Newark Liberty International Airport. The company has also expanded its presence in the Southeastern U.S. through the acquisition of BCC Engineering, a transportation engineering firm, for $230 million.
On the financial front, Parsons reported a 28% increase in revenues year-over-year, reaching $1.8 billion in the third quarter, accompanied by a 31% rise in adjusted EBITDA. Goldman Sachs (NYSE:GS) recently upgraded Parsons from Neutral to Buy, reflecting confidence in the company's robust infrastructure and growth potential, while Jefferies maintained a Buy rating on Parsons, raising the price target to $130.00 from the previous $125.00.
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