Booz Allen Hamilton Sees Revenues Declining, but Hold On for the Ride

Source: Thinkstock

Source: Thinkstock

Booz Allen Hamilton Holding Corporation (NYSE:BAH) is an interesting company, and it makes a hefty profit. It provides management consulting, technology, and engineering services in the United States. Its services include enhancing field intelligence systems, delivering rapid response solutions, infusing lifecycle sustainment capabilities, and employing systems and consulting methods to help expand care and support for soldiers and their families. It also provides integrated strategy and technical services as well as mission-critical support and solutions. It employs data collection management and analytical services and is engaged in supporting clients in defense agencies.

The company also provides strategy and technology expertise to clients in systems engineering. It is involved in supply chain research, cyber-security, personnel and readiness research, countering weapons of mass destruction and integrated intelligence, surveillance, and reconnaissance to space and global strike operations. In addition, it offers critical support in strategic planning, policy development, program development and execution, and program management for research and development projects. The stock is cheap only trading at 14 times earnings, and it offers a 2 percent dividend yield. The stock is right in the middle of its fifty-two-week range, and I suspect it could rebound soon despite an awful quarter.

The stock is off its highs mainly because Booz Allen’s 9.4 percent decline in revenue in the fourth quarter of fiscal 2014 compared with the prior year period resulted from reductions in headcount due to lower demand in an uncertain federal budget environment. In addition, there were two fewer work days in the quarter compared to the prior year period, as well as the additional impact of three full and two partial weather-related government closures and a reduction in billable expenses. Lower headcount led to fewer billable hours in total.

In the fourth quarter of fiscal 2014, operating income decreased to $89.2 million from $112.9 million in the prior year period and adjusted operating income decreased to $91.4 million from $116.9 million in the prior year period. The declines in operating income and adjusted operating income were driven by reduced revenue and the timing of indirect expenditures, as the company manages its significant level of investments in people, capabilities, and business development on an annual, rather than a quarterly basis. Adjusted earnings decreased to $107.2 million from $133.6 million in the prior year period. These metrics were impacted by the same factors as adjusted operating income.

As revenues and operating income were down year-over-year, net income decreased to $46.9 million from $54.8 million in the prior year period. Adjusted net income decreased to $49.2 million from $58.2 million in the prior year period. Further, diluted earnings per share decreased to $0.30 from $0.37 in the prior year period while adjusted diluted earnings per share decreased to $0.33 per share from $0.40 in the prior year period. The declines in per share earnings were driven by the same factors as net income and adjusted net income, as well as an increase in share count. Despite the bad quarter, the company is not a sell.

Chairman and CEO Ralph W. Shrader said, “Last spring, we provided revenue and earnings guidance for fiscal year 2014, and reiterated our margin improvement goals. ‘Im proud to report that, even with the uncertainties faced by our industry, we delivered on our bottom line guidance and exceeded our margin goals. Despite challenging market conditions which have affected every company in our sector, Booz Allen has performed well serving our clients in their core missions and delivering strong returns to our investors.

“For fiscal year 2015, we are forecasting continued margin improvement and solid earnings with an expected modest decrease in revenue. We believe our federal clients have funds to spend as the end of the government fiscal year approaches, and based on recent contract wins, believe that Booz Allen will take share. Our focus and commitment reaches well beyond the current fiscal year. We continue to invest in the future in promising market areas in commercial and international, and in building deeper capabilities in engineering, advanced analytics, cyber, predictive intelligence, enterprise integration, and software development. As we celebrate our 100th anniversary in business in 2014, were putting in place growth platforms that will position us to thrive in Booz Allen’s second century.”

Looking ahead, the stock is a hold in my opinion. It needs time for its investments to play out. Further, the fourth quarter saw seasonally strong award activity as reflected in a book to bill of 0.62 for the quarter, which was stronger than the 0.49 book to bill for the entire second half of fiscal 2013. For fiscal 2015, the company expects a mid-single digit percentage decline in revenue. At the bottom line, for the full year, the company is forecasting diluted earnings per share to be in the range of $1.44 to $1.54, and adjusted earnings to be on the order of $1.50 to $1.60 per share.

Disclosure: Christopher F. Davis holds no position in Booz Allen Hamilton and has no plans to initiate a position in the next 72 hours. He has a hold rating on the stock and a $23 price target.

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