Is Parsons Corporation (NYSE:PSN) Potentially Undervalued?

By
Simply Wall St
Published
January 19, 2022
NYSE:PSN
Source: Shutterstock

Parsons Corporation (NYSE:PSN), might not be a large cap stock, but it received a lot of attention from a substantial price movement on the NYSE over the last few months, increasing to US$36.87 at one point, and dropping to the lows of US$30.91. Some share price movements can give investors a better opportunity to enter into the stock, and potentially buy at a lower price. A question to answer is whether Parsons' current trading price of US$32.80 reflective of the actual value of the mid-cap? Or is it currently undervalued, providing us with the opportunity to buy? Let’s take a look at Parsons’s outlook and value based on the most recent financial data to see if there are any catalysts for a price change.

See our latest analysis for Parsons

What is Parsons worth?

Parsons is currently expensive based on my price multiple model, where I look at the company's price-to-earnings ratio in comparison to the industry average. In this instance, I’ve used the price-to-earnings (PE) ratio given that there is not enough information to reliably forecast the stock’s cash flows. I find that Parsons’s ratio of 59.14x is above its peer average of 19.21x, which suggests the stock is trading at a higher price compared to the Aerospace & Defense industry. If you like the stock, you may want to keep an eye out for a potential price decline in the future. Given that Parsons’s share is fairly volatile (i.e. its price movements are magnified relative to the rest of the market) this could mean the price can sink lower, giving us another chance to buy in the future. This is based on its high beta, which is a good indicator for share price volatility.

What kind of growth will Parsons generate?

earnings-and-revenue-growth
NYSE:PSN Earnings and Revenue Growth January 19th 2022

Future outlook is an important aspect when you’re looking at buying a stock, especially if you are an investor looking for growth in your portfolio. Buying a great company with a robust outlook at a cheap price is always a good investment, so let’s also take a look at the company's future expectations. With profit expected to more than double over the next couple of years, the future seems bright for Parsons. It looks like higher cash flow is on the cards for the stock, which should feed into a higher share valuation.

What this means for you:

Are you a shareholder? It seems like the market has well and truly priced in PSN’s positive outlook, with shares trading above industry price multiples. However, this brings up another question – is now the right time to sell? If you believe PSN should trade below its current price, selling high and buying it back up again when its price falls towards the industry PE ratio can be profitable. But before you make this decision, take a look at whether its fundamentals have changed.

Are you a potential investor? If you’ve been keeping an eye on PSN for a while, now may not be the best time to enter into the stock. The price has surpassed its industry peers, which means it is likely that there is no more upside from mispricing. However, the optimistic prospect is encouraging for PSN, which means it’s worth diving deeper into other factors in order to take advantage of the next price drop.

If you want to dive deeper into Parsons, you'd also look into what risks it is currently facing. For example - Parsons has 1 warning sign we think you should be aware of.

If you are no longer interested in Parsons, you can use our free platform to see our list of over 50 other stocks with a high growth potential.

Discounted cash flow calculation for every stock

Simply Wall St does a detailed discounted cash flow calculation every 6 hours for every stock on the market, so if you want to find the intrinsic value of any company just search here. It’s FREE.

Make Confident Investment Decisions

Simply Wall St's Editorial Team provides unbiased, factual reporting on global stocks using in-depth fundamental analysis.
Find out more about our editorial guidelines and team.