Earnings Hindsight: Booz Allen Hamilton

Booz Allen Hamilton 2Q 2023

• EPS: $1.47 vs. $1.25 consensus estimate (net income up 16.9% YoY)

• Revenue: $2.7B vs. $2.51B consensus (up 18% YoY)

• Backed FY adjusted EPS view of $4.80 to $4.95 (consensus $4.95)

• Lowered FY net cash from operating activities to $160M to $260M from $500M to $600M due to legal settlement

• Funded backlog: $4.9 billion (up 22%)

• Book-to-bill: 1.03x

Key quote: “Our performance is ahead of expectations we set in May. Demand for our services and solutions, combined with record headcount growth, continues to fuel our momentum. While we’re pleased that Congress raised the debt ceiling in June, significant uncertainty still remains about the budget for the government’s next fiscal year. For us, the key to achieving and exceeding our expectations is our success in selling and starting work before September 30. That was our premise going into the year.” - CEO Horacio Rozanski

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Why we should have seen this coming: To be honest, they told us to expect it. For a few quarters now, Booz Allen Hamilton has been saying they were in a period of investment that should translate into robust growth heading into fiscal 2024. We have also been waiting for the company to put a government investigation into its cost accounting behind it. We got the settlement earlier this month (hence the cash charge above), and now we are beginning to see that promised growth.

Note the government concluded that investigation without recommending any enforcement action, and also note that Booz Allen Hamilton’s 11.6% adjusted EBITDA margin still came in above consensus. So hopefully that popular ding can be put to rest.

Headcount is a great indicator for these “Beltway Bandits,” because they hire for work they know they have secured. Headcount was up 11.2% year over year.

How to think: Booz Allen probably isn’t a household name unless you are a fan of the movie Snowden. But it is one I tend to go on about a lot, especially in comparison to other high-flying would-be or would-rather-not-be defense specialists.

The book-to-bill, a measure of how much business the company brought in during the quarter vs. how much it billed out, was encouraging. Anything above 1x implies growth and note this quarter’s figure 1.03x is well above last year’s 0.72x. Also note the last twelve-month book-to-bill of 1.24x, which makes Booz Allen a standout among its peers.

My biggest issue with the quarter was the guidance. This was the company’s first quarter of fiscal 2024, so we are only 25% through the fiscal year. Rozanski’s quote clearly indicates the company is being conservative, and given we have a split government and by the time the budget talks heat up we’ll be nearly a year away from a big election there is probably reason for caution.

But that caution is also a potential opportunity. The company is guiding for full year revenue growth of 7% to 11% coming off a quarter where it just grew almost 17%. Wall Street is already at the top of the earnings guidance. Yes, a lot could go wrong. And as Rozanski notes there is a huge timing issue here, and a question of what gets done in what fiscal year. But if nothing else there does appear to be upside potential in the quarters to come.

Regardless of timing, Booz Allen Hamilton is a company that has grown revenue at a compound annualized rate north of 8% over the past decade guiding for above trendline growth in fiscal 2024 and which is giving positive signals (like hiring, backlog, book to bill) about future potential.

Booz Allen Hamilton has delivered a total return of 750% over the past decade, 3x the S&P 500. I don’t know if you should buy this stock, sell this stock, or ignore this stock. I’d note that at 1.72x sales as I type (following a nice post-earnings rally) its valuation is at the high end of its range over the past five years. I’m not buying any today.

But I own it. And it sure allows me to sleep better at night than those other wannabe government IT specialists who love to issue press releases and soak up most of the short-term attention.

Booz Allen is my kind of boring.

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