Booz Allen Hamilton Holding Corporation (BAH): Big Growth But Government Dependent

Booz Allen Hamilton Holding Corporation (NYSE:BAH) is a management and technology consultancy in the United States. It has strong cash flow, a low P/E versus peers and the stock is flat on the year whereas the S&P is up 8%. Maybe there is an opportunity here for investors to find a good company lagging the market. Booz Allen Hamilton Holding Corporation (NYSE:BAH) offers services in strategy and change management, organizational efficiency, HR, cloud and cyber technology, strategic technology, systems developing and integration among other areas. That all sounds like a pretty standard consulting company that should do well as the economy recovers.

Booz Allen Hamilton Holding Corporation (NYSE:BAH)

Here is the problem with Booz Allen Hamilton Holding Corporation (NYSE:BAH), in its company description the U.S. government accounts for substantial revenues including the defense, intelligence, and civil markets. Budget cuts, sequestration, defense exposure, all phrases that have clearly driven the shares down. Defense related business accounts for over half of Booz Allen revenues, and Intelligence over 20%. The question is, can Booz Allen Hamilton Holding Corporation (NYSE:BAH) rebound as it finds new business or has the street overpriced the negative effects of these cuts. Management has indicated it believes cost cutting will protect margins during government sequestration, which is positive.

Consulting/Defense Peers

Accenture Plc (NYSE:ACN) is another consultancy that lacks the heavy government exposure of Booz Allen. It trades at 16.3x TTM earnings and has a dividend yield of 2.1% compared to 2.63% at Booz Allen. Consensus FY14 estimates, fiscal year ends March 2014, for Booz Allen are $1.50 per share in earnings, down from $1.63 in FY13. At Accenture Plc (NYSE:ACN), with an August fiscal year end, earnings are expected to grow from $4.30 to $4.67 in FY14. Investors will pay for growth, hence the lower multiples for the BAH shares. The remainder of the peer group, defense/government consulting, trades around 8x – 10x NTM earnings, Booz Allen Hamilton Holding Corporation (NYSE:BAH) trades at 9.2x FY14 earnings. Booz Allen will start to transition away from heavy government exposure and its multiple will likely start to shift more toward Accenture’s and separate from the defense/government related peers.

Growth Markets

In the recent quarter, Booz Allen’s sales declined by 4%. The company is expanding its commercial and international clients, but this remains 2% of sales. Noted earlier, the forecast is for an 8% decline in earnings in FY14. The push into commercial is behind the company’s cyber-security business. This is an area of increasing concern for private companies. Recent news stories have focused on international attacks originating from China on not only government but private companies. Booz Allen’s expertise in this area could drive substantial growth in the currently small commercial business. It is also having some success entering the Middle East markets with a few small awards and expectations for more over the remainder of the year.