Although Booz Allen (BAH) reported generally weaker fiscal second-quarter financial results on October 24, multiple data points and statements by the firm suggest that its performance will meaningfully rebound over the longer term.
In combination with the low valuation of BAH stock and its sizable dividend yield, these positive signs make Booz Allen’s shares worth considering for long-term investors.
A very large systems integrator, Booz obtains nearly all of its revenue from the federal government.
BAH’s Two-Sided Q2 Results
On the negative side, the company’s headline Q2 performance was bleak, as its revenue sank 8.1% versus the same period a year earlier to $2.9 billion, while its net income, excluding certain items, tumbled 21.5% year-over-year (YOY) to $183 million.
However, indicating that better times are likely ahead for the firm, its backlog increased 2.9% YOY to an impressive $40 billion, while its book-to-bill ratio came in at a very strong 1.7. The high book-to-bill ratio shows that the firm is winning very lucrative contracts that will, over the longer term, likely meaningfully boost its top and bottom lines, providing positive catalysts for BAH stock.
And, as I’ll explain in detail in the next section, while some parts of BAH’s business are struggling, other components of it seem to be booming.
A “Bifurcated” Company
“This is the most bifurcated environment I have seen in my decades with Booz Allen Hamilton,” CEO Horacio Rozanski, said on the company’s Q2 earnings call, referring to the fact that the firm’s national security oriented businesses are performing well while its offerings targeted to civilian agencies are struggling.
Among the areas of focus in the former category are “cyber, AI, and warfighting technology,” the CEO explained, noting that the firm is ” the largest provider of AI to the federal government.” With Washington significantly stepping up its funding of AI, the latter status certainly bodes well for the long-term outlook of the company and BAH stock.
Moreover, BAH obtained four national security deals worth more than $800 million each in its fiscal Q2, while it obtained a total of $7.2 billion of new contracts during the three-month period.
And Booz has looked to cut costs with layoffs and other measures in order to reduce the bottom-line impact of the weakness of its civilian offerings, representing another factor that could very well cause its profits to rebound meaningfully in the coming quarters. Additionally, Rozanski noted that the demand from civilian agencies had “stabilized.”
A Low Valuation and a Meaningful Dividend
With a forward price-earnings ratio of just 16.5, BAH is much cheaper than other names in the national security sector. For example, Lockheed Martin (LMT) and GE Aerospace (GE) have forward PE ratios of 16.75 and 44, respectively.
What’s more, due to the decline of BAH stock in the wake of the company’s Q2 results, the stock’s dividend yield has risen to a significant 2.4%. As a result, long-term investors who buy the shares will be paid to wait for its stock price to rebound.
And given the strength of its AI and defense businesses, along with its low valuation, the latter development could easily occur within the next 12 months.
*This article is intended to be informational only; it is not financial advice.
