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Infrastructure and defense services provider Parsons (NYSE:PSN) reported Q2 CY2024 results beating Wall Street analysts' expectations, with revenue up 23.1% year on year to $1.67 billion. The company's full-year revenue guidance of $6.45 billion at the midpoint also came in 1.8% above analysts' estimates. It made a non-GAAP profit of $0.84 per share, improving from its profit of $0.41 per share in the same quarter last year.
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Parsons (PSN) Q2 CY2024 Highlights:
- Revenue: $1.67 billion vs analyst estimates of $1.54 billion (8.2% beat)
- EPS (non-GAAP): $0.84 vs analyst estimates of $0.69 (21% beat)
- The company lifted its revenue guidance for the full year from $6.25 billion to $6.45 billion at the midpoint, a 3.2% increase
- EBITDA Guidance for the full year is $575 million at the midpoint, above analyst estimates of $562.7 million
- Gross Margin (GAAP): 21%, in line with the same quarter last year
- Free Cash Flow of $152 million is up from -$72.86 million in the previous quarter
- Backlog: $8.8 billion at quarter end, down 1.1% year on year
- Market Capitalization: $8.2 billion
Delivering aerospace technology during the Cold War-era, Parsons (NYSE:PSN) offers engineering, construction, and cybersecurity solutions for the infrastructure and defense sectors.
Defense ContractorsDefense 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.
Sales GrowthReviewing a company's long-term performance can reveal insights into its business quality. Any business can have short-term success, but a top-tier one tends to sustain growth for years. Thankfully, Parsons's 10% annualized revenue growth over the last five years was solid. This shows it was successful in expanding, a useful 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 25.8% over the last two years is above its five-year trend, suggesting its demand was strong and recently accelerated.
We can dig further into the company's revenue dynamics by analyzing its backlog, or the value of its outstanding orders that have not yet been executed or delivered. Parsons's backlog reached $8.8 billion in the latest quarter and averaged 2.8% 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 reported remarkable year-on-year revenue growth of 23.1%, and its $1.67 billion of revenue topped Wall Street estimates by 8.2%. Looking ahead, Wall Street expects sales to grow 7.5% over the next 12 months, a deceleration from this quarter.
Operating MarginOperating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses–everything from the cost of goods sold to advertising and wages. It's also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.
Parsons was profitable over the last five years but held back by its large expense base. It demonstrated lousy profitability for an industrials business, producing an average operating margin of 4.8%.
On the bright side, Parsons's annual operating margin rose by 2.4 percentage points over the last five years, as its sales growth gave it operating leverage
This quarter, Parsons generated an operating profit margin of 6.7%, up 1 percentage points year on year. This increase was a welcome development and shows it was recently more efficient because its expenses grew slower than its revenue.
EPSWe track the long-term growth 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 was profitable.
Sadly for Parsons, its EPS declined by 9.6% annually over the last five years while its revenue grew by 10%. However, its operating margin actually expanded during this timeframe, telling us non-fundamental factors affected its ultimate earnings.
We can take a deeper look into Parsons's earnings to better understand the drivers of its performance. A five-year view shows Parsons has diluted its shareholders, growing its share count by 19.7%. This dilution overshadowed its increased operating efficiency and has led to lower per share 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 also analyze EPS over a shorter period to see if we are missing a change in the business. For Parsons, its two-year annual EPS declines of 8.2% show it's still underperforming. These results were bad no matter how you slice the data.
In Q2, Parsons reported EPS at $0.84, up from $0.41 in the same quarter last year. This print easily cleared analysts' estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Parsons to grow its earnings. Analysts are projecting its EPS of $0.71 in the last year to climb by 349% to $3.19.
Key Takeaways from Parsons's Q2 ResultsWe were impressed by how significantly Parsons blew past analysts' revenue expectations this quarter. We were also excited its EPS outperformed Wall Street's estimates. On the other hand, its backlog missed. Overall, this quarter seemed fairly positive and shareholders should feel optimistic. The stock remained flat at $77.85 immediately after reporting.
