Booz Allen Hamilton Seeking More Agility

By Ryan C. Fuhrmann | June 09, 2011 AAA

Booz Allen Hamilton (NYSE:BAH) bills itself as a leading management and technology consulting service provider to the U.S. government. The government accounts for the vast majority of revenue and it wins more than half of the new contracts it bids on. The company went public in late 2010 at $17 per share and trades only slightly above its IPO price. Below is a further look at its business and an overview of its recent financial results.

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Full-Year Review
Sales advanced 9.1% to $5.6 billion as its defense, intelligence and civil market segments all posted positive growth. Its backlog grew even stronger, rising 21.1% to $10.9 billion to provide a good deal of visibility on the sales pipeline over the next couple of years. Management cited cyber and health as its fastest growing market segments.

Reported operating income jumped 60% to $319.4 million as cost of revenue lagged top-line growth, as did SG&A expense growth. A drop in interest expense helped contribute to a more than tripling of net income to $84.7 million, or $0.66 per diluted share. Operating cash flow was quite strong, coming in at $296.3 million while free cash flow was $270.5 million, or approximately $1.62 per diluted share.

Outlook
Booz Allen currently projects mid-single-digit sales growth during the first half of the new year and slightly stronger growth in the second half of the year as government contract awards and funding tend to increase in September, which is the end of the government fiscal year. It expects earnings between $1.40 and $1.50 per diluted share and a slightly higher share count of 143 million shares.

Bottom Line
At the current share price, Booz Allen trades at a forward earnings multiple and trailing free cash flow multiple of about 12. This is pretty reasonable for a market leader that has a high sales backlog and a customer that is certain to pay its bills given its ability to literally mint money. Concerns do abound about the government's ability to spend more than it earns, but many of the entities Booz Allen serves count as mission critical and are unlikely to see significant spending cutbacks.

Competition is intense in the industry, with large defense firms including Lockheed Martin (NYSE:LMT) and Raytheon (NYSE:RTN) considered key rivals, as are other general service providers such as CACI International Inc. (Nasdaq:CACI) and Unisys Corporation (NYSE:UIS). And while sales are likely to be stable, growth could be an issue given spending pressures will remain a reality for many years to come and defense spending cutbacks are likely to be severe. Finally, debt levels are pretty high, which recently weighed in at nearly 52% of total invested capital that stems from a buyout from private equity firm Carlyle back in 2008. Overall, though, Booz Allen remains a solid watch-list candidate to see if growth trends improve now that it is a public company. One option would be to use its stock as a currency to buy out other rivals. (For related reading, also take a look at The Defense Gravy Train Has Been Derailed.)

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