The digital revolution may have hatched in the private sector, but by now the federal government is all in. Its budget calls for spending $88 billion on information technology in fiscal 2020, notes blue chip investing expert Richard Moroney, editor of Dow Theory Forecasts.
The government spent about the same amount last year and will likely do similarly next year, which explains part of our optimism regarding Booz Allen Hamilton (BAH), a technology consultant that generates 96% of its revenue from government clients.
In particular, the government’s increasing interest in artificial intelligence (AI) should benefit Booz Allen, which has focused its aggressive hiring efforts in recent years on building expertise in the field. Government entities have responded to Booz Allen’s efforts by fattening its market share via generous contracts.
At the end of June quarter, Booz Allen’s backlog neared $20 billion, almost three years’ worth of revenue and up 16% from a year ago. Bookings exceeded billings by roughly 30% in the June quarter.
The strength and consistency of Booz Allen’s results bears out the sturdiness of its business model. Sales rose in 17 consecutive quarters, averaging growth of 8% in the last 12 periods.
In the 12 months ended June, sales rose 9%, per-share profits 30%, and operating cash flow 71%. Analysts expect continued growth, projecting sales to rise at least 7% and per-share profits at least 12% in fiscal 2020 ending March, as well as fiscal years 2021 and 2022.
At 24 times trailing earnings, Booz Allen isn’t cheap. We don’t shy away from stocks already on a roll, as long as those gains were sparked by the type of growth capable of driving shares even higher. In our view, Booz Allen qualifies.
