Booz Allen Hamilton Holding Corp. (BAH, Financial) is a management consultancy that after World War II began to score major contracts from the armed forces across various areas. Today, the company has kept that lucrative client base and has even been dubbed the “world’s most profitable spy agency” by Bloomberg, having recruited over 1,000 former intelligence officers. With the current war between Russia and Ukraine, its services are now more valuable than ever.
Overview of business
The company's main services include security, the cloud, engineering, digital experience and even artificial intelligence.
Its AI offering includes AI strategy and design, AI systems engineering, AI operations and AI research and development.
Its SMART Cloud services encompass Migration, multi-cloud operations and edge cloud.
According to Grandview Research, the cloud industry was valued at $483 billion in 2022 and is forecasted to grow at a 14.1% compounded annual rate. Therefore, Booz Allen Hamilton is poised to benefit from this trend.
Its other business offering Cybersecurity, is also a lucrative area. This comprises of many applications from Supply Chain Security to Cloud Security and even Ransomware recovery.
Financial performance
The company reported solid financial results for its fiscal first quarter of 2024 in July. Its revenue of $2.7 billion rose by 18% year over year. Organically, the growth was 16.7%, driven by a double-digit increase in the federal industry.
Given this is a consultancy, if we exclude billable expenses, its revenue rose by 16.9% year over year to $1.8 billion.
In its earnings call, management praised its VLT strategy, which consists of velocity, leadership and technology.
Its defense business increased its revenue by 19% year over year. This was not a surprise given the Russia-Ukraine crisis and increased military spending.
Its civil revenue also rose by a solid 20% year over year, driven by digital transformation tailwinds across federal agencies.
Revenue for the intelligence segment increased by 18% year over year, driven by several new customer wins. This is a positive sign as, given the current macroeconomic climate, many analysts are pulling back spending.
The global commercial business' revenue, however, declined 23% year over year. A positive was this was driven by the sale of its Manage Threat services business and, therefore, is not an indication of challenges. It was also a fairly small business segment, contributing just 2% of revenue.
Future prospects
Demand for its services rose as net bookings were $2.7 billion. Its book-to-bill ratio was also 0.72 times higher than the prior year.
The company reported a backlog of $31.3 billion, up 9.3% year over year. While its funded backlog increased by 22% to $4.9 billion.
Financial health and dividend
Booz Allen Hamilton reported operating income of $234 million in the first quarter, which was higher than the $207 million reported in the prior-year quarter.
Its adjusted Ebitda grew 21.5% year over year to $307 million, while the adjusted Ebitda margin was 11.6%, up 40 basis points year over year. This was driven by an increased focus on efficiency.
Surprisingly, this positive margin improvement was despite an 11.2% increase in headcount, to a staggering 32,000 employees. Given the business is a consultancy, effectively its people are the product, as Booz Allen Hamilton “rents” them out via a billable hour model.
Its net income was $161 million, up 16.9% year over year.
Moving on to it balance sheet, the company reported $210 million of cash on hand. It also recorded net debt of $2.7 billion, which is fairly high, and a net leverage ratio of 2.5 times its adjusted Ebitda. However, given this is a legacy business (founded in 1914), this is expected.
Its operating cash flow was light during the quarter due to the seasonality of bonus payments.
Booz Allen Hamilton pays a forward dividend yield of 1.68%. With solid government contracts, this makes the stock ideal for income investors.
Valuation
Booz Allen Hamilton trades with price-sales ratio of 1.53, which is higher than its five-year average. Its forward price- earnings ratio is also high at 24, which is above its average for the same period.
I believe this is expected due to the quality of the company, its growth and consistency of customers.
The GF Value Line indicates a fair value of $110 per share based on historical ratios, past financial performance and analysts' future earnings projections. Thus, the stock is fairly valued at the time of writing.
Conclusion
Booz Allen Hamilton is an iconic organization that has deep roots and partnerships with government institutions. I believe its ties to the military are a major competitive advantage, given the geopolitical uncertainty and Russia-Ukraine war. The company’s focus on hot topics such as cybersecurity, AI and the cloud are also major positives.
