Wells Fargo Downgrades Parsons On Valuation

Technology-focused defense company Parsons Corp PSN went public in early May at $27 per share and is now trading north of Wells Fargo's price target.

The Analyst

Ed Caso downgraded Parsons from Outperform to Market Perform with an unchanged $36 price target.

The Thesis

Wells Fargo's positive outlook on Parsons' management team, market positioning and expectations for outperformance remain unchanged, Caso said in the Wednesday downgrade note. (See his track record here.)

The stock is trading at sell-side firm's $36 price target as of Wednesday, and a revision in the rating is justified for valuation reasons, the analyst said. 

Shares of Parsons are trading at 12 times 2020 estimated EV/EBITDA, which is in-line with government service providers that trade at 11.5 to 12.9 times, Caso said. 

Jacobs Engineering Group Inc JEC boasts a similar business model — a combination of infrastructure and government services — and trades at 11.5 times 2020 estimates, he said. 

Taking a closer look at the business segments shows half of the company's revenue comes from

supporting critical infrastructure — a business with low-to-no-growth and lower margins, the analyst said.

Parsons also has slightly lower government services EBITDA margins, according to Wells Fargo. 

Price Action

Parsons shares were up 0.27% at $36.83 at the time of publication Wednesday. 

Related Links:

The Parsons IPO: What You Need To Know

Morgan Stanley Initiates Coverage On Government Services Stocks

Photo courtesy of Parsons.