Value Line recently initiated coverage of Booz Allen Hamilton Holding Company (BAH) in its flagship product, The Value Line Investment Survey. The company primarily provides management and technology consulting services to the U.S. government in the defense, intelligence, and civil markets.
Founded in 1914 by Edwin G. Booz and James Allen, the company now employs more than 25,000 workers in 80 offices throughout the country. Booz Allen primarily offers consulting services, which range from the technological to the environmental, to government agencies, such as the Department of Defense and the Department of Homeland of Homeland Security. Its dealings with the United States Government began just before our entry into World War II when, in 1940, Booz Allen advised the Navy during its preparation for military engagement. In the more than 70 years since, the relationship has flourished. In fiscal 2012, a whopping 98% of total revenue was derived from dealings with the government.
While the company’s proximity to the defense budget may be concerning on the surface, Booz Allen’s services seem to fit ideally into the military’s leaner, technologically-meaner vision. As bigger ticket items, such as aircraft carriers and fighter aircrafts, are expected to come under intense financial scrutiny, the strategic and surveillance services offered by Booz will likely play an increasingly larger role in the military’s future. Many of its relationships with government clients are longstanding and mutually beneficial, as the company boasted a 91% success rate on re-competed contracts of existing partnerships.
One potential shortcoming for Booz Allen going forward is the company’s tendency to end up in the headlines, mostly related to its long-standing relationships with military agencies. A 2007 Washington Post article detailed the unexplained increase of two no-bid contracts between Booz Allen and the Department of Homeland Security. The two deals, which went from $2 million to $70 million, evolved without any substantial government oversight to protect taxpayer funds. Upon further review, it was determined that the necessary steps were not taken to ensure the deal was in the best interest of the American people. Additionally, in that same year, many senior members of Booz Allen were accused in a Salon magazine article of benefitting from the aforementioned cycle of conflicted interest wherein said employees moved back and forth from the consulting firm to a government role. This, in Salon’s opinion, resulted in many unlawfully obtained contracts. Should this situation re-occur and trigger an official investigation, the company could experience a lower contract-acquiring success rate in the future, which would inevitably hurt the top and bottom lines going forward, as well as the stock.
In any case, Booz Allen provides crucial services to the American Government, and should continue to benefit from generations of strong relationships and successful operations. The company boasts strong cash flow and a substantial order backlog, which should both help going forward.
Subscribers interested in this consulting company are advised to consult Value Line’s quarterly reports for Booz Allen, as well as any Supplementary reports and relevant articles as important news items arise.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.