A Record Backlog and Rising Margins Haven't Stopped Parsons' Nearly 40% Slide

The stock market hates uncertainty, and Parsons Corp. (NYSE: PSN) is serving it up. The engineering and defense company lost a heavily promoted $12.5 billion Federal Aviation Administration (FAA) contract bid in December and faces top-line pressure from the wind-down of a large government contract.

The stock has been hammered, trading down nearly 40% over the past six months, including a 21% single-day drop in December. Yet as revenue expectations decline, actual profitability is improving, with margins hitting a record high in the first quarter. In addition, its backlog reached a new high, driven by solid contract wins at the start of the year.

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A tale of two segments

Parsons is a provider of integrated solutions and services for the security, defense, and infrastructure markets. It operates two primary segments, federal solutions and critical infrastructure, each of which contributes roughly half of total revenue.

The company's troubles began in December, when it lost the bid to modernize the FAA's air traffic control system. Adding to the pressure, a large, confidential contract for the Department of State ended after a government agency reorganization, weighing on near-term organic growth.

The federal solutions business has felt most of the recent pain. Although the defense and intelligence (D&I) division within the segment is performing well. D&I Revenue grew 13.5% year-over-year in the first quarter, driven by U.S. government spending on high-tech areas like cybersecurity, space, and missile defense.

Meanwhile, the critical infrastructure segment has been a bright spot. This division, which designs and manages massive projects such as airports and bridges, is benefiting from spending tied to the U.S. Infrastructure Investment and Jobs Act and from large-scale projects in the Middle East. This strength shows up in the company's backlog, which stands at a record $9.3 billion.

For margins, adjusted earnings before interest, taxes, depreciation, and amortization for the segment improved by 350 basis points in 2025, and this trend continued in the first quarter, with margins up 50 basis points to 10.8%.

Cash flow strain clouds the outlook

While profitability is moving in the right direction, the business transition has strained the company's working capital. Net days' sales outstanding, which measures how long it takes to collect payment, has climbed from 58 to 72 days over the past year. Management points to collection delays in the Middle East and the impact of the shrinking confidential contract. The recent conflict in the region adds another layer of uncertainty to the company's cash collection cycle.

Parsons looks like a solid company facing a tough stretch. The FAA loss was a painful, permanent setback, and the confidential contract loss has created near-term pain, but that drag on growth should subside in the second half of the year.

At current prices, the risk-reward profile has improved as the company works through its revenue headwinds. The stock now trades at a more reasonable valuation at 15.5 times this year's earnings estimates. Admittedly, at this point, it's unclear what impact the conflict with Iran will have on Parsons' business. For investors with the patience to follow the story as it plays out, it makes for an interesting investment idea for your watch list.

Bryan White has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.