Is Kettle Hill's $24M Bet on Parsons Stock a Signal for Value Investors?

Kettle Hill Capital Management's recent $24.18 million investment in Parsons Corporation-bringing its total stake to $30.94 million as of September 30, 2025-has sparked intrigue among value investors. This move, which accounts for 6.96% of the firm's reportable U.S. equity holdings, positions Parsons as the second-largest position in Kettle Hill's portfolio. Given the firm's contrarian value orientation and focus on small-cap opportunities, the question arises: Is this a signal for value investors to reassess defense and infrastructure contractors?

Kettle Hill's Strategic Rationale

Kettle Hill's investment strategy is rooted in bottom-up fundamental research combined with macro awareness, targeting undervalued opportunities in the U.S. small-cap market. The firm's CIO, Andrew Kurita, has long emphasized contrarian bets, often capitalizing on market dislocations. In the case of Parsons, the firm appears to be leveraging a pullback in the stock's valuation amid broader sector headwinds.

Parsons, a key player in defense, intelligence, and critical infrastructure, has faced revenue declines in 2025 due to a drop in its confidential contract and reduced Federal Solutions segment volume. However, the company's Critical Infrastructure segment has shown resilience, with 18% year-over-year revenue growth driven by transportation, urban development, and space/missile defense projects. This divergence in performance suggests a potential mispricing of the company's long-term prospects, a classic contrarian opportunity.

Sector Tailwinds and Valuation Metrics

The defense and infrastructure sector is being reshaped by the fiscal year 2026 National Defense Authorization Act (NDAA), which authorizes $900 billion in spending. This includes multiyear contracts for shipyard modernization, munitions production, and infrastructure projects like the $15 billion Pacific Deterrence Initiative MACC contract recently secured by Parsons. Such contracts align with the firm's expertise in high-margin, long-duration government work.

Despite these tailwinds, Parsons' valuation remains mixed. Its trailing twelve months (TTM) price-to-earnings (P/E) ratio of 38.39 exceeds the industry average for defense primes, while its enterprise value-to-EBITDA (EV/EBITDA) ratio stands at 18.48. However, the company's price-to-book (P/B) ratio of 2.68 by December 2025 is significantly lower than peers like Mirion Technologies (56.02) and Kyndryl Holdings (19.76), suggesting potential undervaluation relative to tangible assets.

Contrarian Case for Parsons

The case for a contrarian bet hinges on three pillars:
1. Strong Backlog and Contract Pipeline: Parsons maintains an $8.8 billion backlog, with 72% funded, and has secured high-profile contracts such as the PDI MACC and BASS 2.0 modernization projects. These provide visibility into future cash flows.
2. Margin Resilience: While net income fell 12.67% year-over-year to $64 million, adjusted EBITDA of $158 million reflects a 9.8% margin, up 60 basis points from the prior year. This margin expansion, driven by improved program performance and accretive acquisitions, signals operational discipline.
3. Sector Reforms: The NDAA's emphasis on multiyear contracts and streamlined acquisition processes could benefit firms like Parsons, which excel in complex, long-term infrastructure projects.

Risks and Considerations

Parsons' reliance on U.S. government contracts exposes it to budgetary shifts and political risks. Additionally, its revenue decline in 2025-partly due to a one-time confidential contract reduction-highlights the volatility inherent in government-dependent firms. While the company's EBITDA margin expansion is encouraging, its net income underperformance relative to peers (101.55% industry growth vs. -12.67% for Parsons) raises questions about profitability sustainability.

Conclusion

Kettle Hill's $24 million bet on Parsons reflects a calculated contrarian play. By capitalizing on a pullback in valuation and sector-specific tailwinds, the firm appears to be positioning for a re-rating of Parsons' long-term prospects. For value investors, the key lies in assessing whether the company's strong backlog, margin resilience, and alignment with NDAA-driven infrastructure reforms can offset near-term revenue volatility. While risks remain, the combination of a discounted P/B ratio, robust contract pipeline, and favorable sector dynamics makes Parsons a compelling case study in contrarian value investing within the defense/infrastructure space.