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Booz Allen Hamilton’s Strong Management Continues to Offset Tough Environment

Booz Allen Hamilton reported solid fiscal second‐quarter results Monday morning that are generally consistent with the trends we have seen at the company for a while—namely slightly lower‐than ‐expected revenue, but better‐than‐expected EPS. Specifically, revenue decreased 3% year‐over‐year and was slightly below our expectations, but adjusted EPS were $0.02 better than the consensus.

The demand environment for government consulting clearly remains challenging and is unlikely to get much better in the near term, and Booz Allen is not immune to those challenges. To its credit, Booz Allen’s management continues to offset the uncertainty in government spending by strong management of its expense structure and balance sheet. We now expect EBITDA margins to reach 9.0% this fiscal year, up from 8.3%, 7.9%, and 7.1% during the prior three years. Revenue growth and EPS also should get a small lift from its recent acquisition of Defense Systems Engineering & Support (DSES).

Overall, management reaffirmed it 2015 adjusted EPS guidance range of $1.60‐$1.70 and initiated flat year‐over‐year revenue guidance for the second half of the year. The company had not previously provided revenue guidance because of the uncertain government spending environment, but it decided to do so at this point. The company’s new guidance includes the acquisition of DSES (which should add about 200 basis points to revenue growth in the second half of the year) and assumes that there is no sequestration at the end of this calendar year. Based on this guidance, we raised our 2015 adjusted EPS estimate by $0.01, to $1.61, and raised our 2014 estimate by $0.04, to $1.54, to include the DSES acquisition.

Shares of Booz Allen trade at 8.6 times our forward adjusted EPS estimate, which is roughly in line with the average of 8.4 times for most government consulting firms. The company’s enterprise value is 6 times our forward EBITDA estimate, which is above the government consulting average of 5 times. Booz Allen’s management deserves credit for nimbly managing the company’s expense structure and balance sheet to offset the tougher demand environment. We see less room to continue doing that, however, and the difficult demand environment will continue to weigh on the company’s top‐line growth.

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