Embrace Booz Allen Hamilton Weakness
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Embrace Booz Allen Hamilton Weakness

Booz Allen Hamilton Holding Corp. (NYSE: BAH) has been under pressure since the end of January when the public-sector contractor reported financial results that were slightly below plan.

The digital transformation is changing every sector and government is no exception. In fact, the need to move forward with new strategies that digitalize information may be more pressing than ever before.

Booz Allen has been working through a $1.03 billion contract awarded in 2018 by the Department of Homeland Defense. The project began as a major cybersecurity initiative to harden online defenses across six federal agencies. Since then, the contract has expanded as cyber threats have become more complex.

Last December, managers at SolarWinds Corp. (NYSE: SWI) acknowledged that hackers gained back door access to Orion, its network management platform. The software is considered foundational as it keeps networks up and running for 80% of Fortune 100 companies and all across the United States federal government.

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The Orion hack was unique because cyber criminals were able to install malware that looked like part of the system code. The malicious code was even able to create its own digital signature certificate and send out official looking software updates. These so-called supply-chain hacks are difficult to combat because they look like routine system updates to guard against cyber threats.

Reuters reported in December that the U.S. Treasury and Commerce Departments were among the Orion hack victims.

Booz Allen is uniquely qualified to tackle these events.

As a consultancy, the company has the ability to scale up and down to meet challenges large and small. The company offers engineering, data analytics, consulting and cyber expertise. It also has the full blessing of the U.S. federal government.

It’s a powerful selling feature and Booz Allen can offer one-stop solutions. It can integrate architecture and reduce the number of vendors. This increases transparency and accountability.

Historically, this has been a great business, generating solid cash flow and beating the S&P 500 by 100 basis points during the past decade. Yet investors were clearly spooked by the third quarter financial results.

In my opinion, they’re overreacting.

Moving forward, managers said they expected Q4 earnings to be between $3.70 and $3.82 per share. That’s above the prior guidance but short of the FactSet consensus number of $4.20.

The problem seems to be that that book-to-bill ratio, a metric that measures future billing, slipped to $23.3 billion from $24.6 billion in Q2.

Investors should be aware that Q3 has typically been a weak quarter. Booz Allen missed consensus numbers in each of the last three years. In every case, the company and stock soon recovered.

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It’s also noteworthy that CEO Horacio Rozanski attributes the sluggish results to temporary delays for existing projects given uncertainty about the federal budget and the ongoing COVID-19 crisis.

Rozanski also noted that Booz is in the process of scaling up a 5G team. The company has forged partnerships with a number of 5G technology companies. Project managers are ready to deploy the new networks across government installations.

Shares are up 910% since 2010 and are just pulling into their one-year average.


 

Shares trade at 20.2 times forward earnings and only 1.5 times sales. Booz pays a 1.4% dividend, a rarity for growth businesses these days.

Savvy investors should consider using this period of weakness as a buying opportunity.

Best wishes,

Jon D. Markman

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