Booz Allen Hamilton Holding Corporation (BAH): Aerospace and Defense Stock Embraces Commercial Markets

Engility Holdings Inc (NYSE:EGL), the government contractor that was spun-off from L-3 Communications last July so that L3 could focus on its international and commercial segments, was recently named the primary contractor for the multi-million dollar assignment it was previously awarded from the Space and Naval Warfare Systems Center. The mandate could be worth as much as $900 million if options are fully exercised. Engility is performing production, installation, and in-service support to the agency for communication, combat and technology systems. The stock is trading about 8% below its historic high.

Engility, with $409 million in 3Q revenue, may be the one in the defense group that is a diamond in the rough. Engility, a pure-play government services business, was formed with the current challenging market conditions in mind. The company considers itself a growth business, and if it is successful in taking market share in the current tough environment is likely to be a leader when the economic environment improves.

Booz Allen’s Outlook

With all of these opportunities plus more in front of Booz Allen, it seems like nothing can slow the company down. Unfortunately, the contracts haven’t fully translated to the top and bottom lines.

In its fiscal 3Q, Booz Allen experienced a 3.5% drop in revenues versus the year ago period. The company blames the shortfall on an increase in “pass-through costs” this year that occurred in low-margin areas and not in its core business, according to management executives speaking at the Cowen & Company conference. For the full year, Booz Allen expects revenues to decline in the low single digits.

The company has a trailing price-to-earnings ratio of only nine, and the stock may be undervalued. Based on the best case scenario for adjusted earnings for the full year, which is $1.65 per share, the P/E ratio is eight at the stock’s current market value.

With much of the performance of defense stocks tied to an uncertain global economy and federal budget, the investment waters in the sector are murky. Nonetheless, as L-3 Communications suggested in recent shareholder materials, “defense down-cycles will eventually turn.” As defense companies continue to pay dividends and compete for market share, and the government continues to spend money, there is opportunity for shareholders to profit.

The article Aerospace and Defense Stock Embraces Commercial Markets originally appeared on Fool.com and is written by Gerelyn Terzo.

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