Stock Analysis

Getting In Cheap On Parsons Corporation (NYSE:PSN) Might Be Difficult

NYSE:PSN
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When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 16x, you may consider Parsons Corporation (NYSE:PSN) as a stock to avoid entirely with its 44.7x P/E ratio. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

Parsons certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.

See our latest analysis for Parsons

pe-multiple-vs-industry
NYSE:PSN Price to Earnings Ratio vs Industry January 4th 2024
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Parsons.

What Are Growth Metrics Telling Us About The High P/E?

In order to justify its P/E ratio, Parsons would need to produce outstanding growth well in excess of the market.

If we review the last year of earnings growth, the company posted a terrific increase of 46%. The latest three year period has also seen an excellent 53% overall rise in EPS, aided by its short-term performance. Accordingly, shareholders would have probably welcomed those medium-term rates of earnings growth.

Turning to the outlook, the next year should generate growth of 28% as estimated by the ten analysts watching the company. That's shaping up to be materially higher than the 10% growth forecast for the broader market.

In light of this, it's understandable that Parsons' P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that Parsons maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Parsons with six simple checks will allow you to discover any risks that could be an issue.

If these risks are making you reconsider your opinion on Parsons, explore our interactive list of high quality stocks to get an idea of what else is out there.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.