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>>> Booz Allen Hamilton: Solid Growth With Ukraine Tailwinds


Guru Focus

by Ben Alaimo

September 26, 2023


https://finance.yahoo.com/news/booz-allen-hamilton-solid-growth-074556932.html


Booz Allen Hamilton Holding Corp. (NYSE:BAH) is a management consultancy that back in post World War 2, 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, having recruited over 1,000 of former intelligence officers. With the current war with Russia and Ukraine, its services are now more valuable than ever. In this post, I'm going to break down its business model and financials, lets dive in.

Overview of Business Model

BAH 30-Year Financial Data

The intrinsic value of BAH

Its main services include Security, the Cloud, engineering, digital experience, and even Artificial Intelligence.

Its AI offering includes; AI strategy & design, AI Systems Engineering, AI Operations, and AI R&D.

Its SMART Cloud services includes; Migration, multi-cloud operations and edge cloud.

Market Position and Opportunities

According to Grandview Research, the Cloud industry was valued at $483 billion in 2022 and it is forecast to grow at a 14.1% compounded annual growth rate (CAGR), therefore Booz Allen Hamilton Holding Corp (NYSE:BAH) 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 what it refers to as the first quarter of the fiscal year 2024. Its revenue was $2.7 billion, which rose by 18% year over year. Organically the growth was 16.7%, driven by double-digit growth 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.

Revenue Breakdown

Its Defense business increased its revenue by 19% year over year. This wasn't a surprise given the Russia-Ukraine crisis and increased military spending.

Its Civil revenue also rose by a solid 20% year over year. This was driven by digital transformation tailwinds across federal agencies.

Its Intelligence segment revenue 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.

Global Commercial Business Performance

Moving onto the global commercial business, this declined by an eye-watering 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 to 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 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 Holding Corp (NYSE:BAH) reported operating income of $234 million in Q1,FY24 which was higher than the $207 million reported in the prior year.

Its Adjusted EBITDA was $307 million, up 21.5% year over year. While its 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 the Booz Allen Hamilton Holding Corp (NYSE:BAH) rents them out via a billable hour model.

Its net income was $161 million, up 16.9% year over year.

Balance Sheet Analysis

Moving onto it balance sheet, the company reported $210 million of cash on hand. With net debt of $2.7 billion, which is fairly high, with 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 Holding Corp (NYSE:BAH) pays a forward dividend yield of 1.68%, with solid government contracts which makes it ideal for income investors.

Valuation

Booz Allen Hamilton Holding Corp (NYSE:BAH) trades a price to sales (P/S) ratio = 1.53, which is 8% higher than its 5 year average. Its forward price to earnings (P/E) is also high at 24, which is 7% higher than its 5 year average.

I believe this is expected due to the quality of the company, its growth and consistency of customers.

The GF value calculator indicates a value of $110 per share and thus the stock is fairly valued at the time of writing.

Conclusion

Booz Allen Hamilton Holding Corp (NYSE:BAH) 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.

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