CM #11: Booz Allen: Betting on the Beltway
Short-term headwinds likely to fade with 110-year track record of growth
Booz Allen is the second largest government IT Contractor. When the government has IT needs from custom software to cybersecurity, Booz Allen is one of the first firms to get involved.
Booz Allen is also in a 50% drawdown, its worst as a public company
What happened? The Department of Government Efficiency
98% of Booz Allen revenue is “from contracts where the end client was an agency or department of the U.S. government” (Form 10K). For most of Booz Allen’s history, this was the safest customer in the world: recurring contracts and a customer that rarely cuts budget or pulls back with the business cycle.
Booz Allen with just this one customer has grown revenue 5% and EPS almost 25% annually over the last 15 years, becoming a Fortune 500 in the process.
So why can it recover? And why now?
Sentiment lagging DOGE developments
Well positioned for expanded military tech spending
Last quarter guidance was intentionally sandbagged
The DOGE Effect
DOGE came into the white house with a mandate to cut costs in the federal government. As a pure government contractor, Booz Allen was logical target for unnecessary contracts, Booz Allen revenue is down 8% YOY, and FCF down 29%
The damage is concentrated in Booz Allen’s civil portfolio. While Booz Allen’s speciality is national security/intelligence consulting, Booz Allen had built a side business of consulting for civil agencies.
In FY 2025, “Civil customers represented approximately 35% of our revenue” with clients including Departments of Veterans Affairs, Health and Human Services, Treasury, Labor, Homeland Security, Justice, Energy, Commerce, and Transportation”
Booz Allen anticipates “civil business revenue will decline in the low 20% range for the year.” Additionally, the civil contracts were higher margin than the military contracts, “putting downward pressure on margins in the near to medium term” (Q2 2026 earnings).
Now is the damage done?
DOGE as an entity no longer functionally exists.
Elon has returned his focus to Tesla/SpaceX and “U.S. President Donald Trump’s Department of Government Efficiency has disbanded with eight months left to its mandate.”
The end of DOGE is more than symbolic, it corresponds to a real shift in the administration’s priorities. Scott Kupor, director of the Office of Personnel told Reuters: “There is no target around reductions anymore.”
BAH confirmed the shift in the latest earnings call, stating “our civil business has stabilized and we have not experienced any contract actions [in the latest quarter].”
Unique National Security Moat
Now what about other 65% of the business? It’s classified.
While set up as a traditional management consultancy structure, Booz Allen accumulates talent with military experience and security clearances.
Obtaining a security clearance is a lengthy process, taking 140 days on average and 240 days for top-secret.
Booz Allen has a unique employee population. 72% of Booz Allen employees hold security clearances and 29% have military experience (Form 10K). The contracts Booz Allen bids for often require a security clearance with unique expertise such as cybersecurity, programming, etc. Booz Allen serves as an outlet for individuals with these unique backgrounds to serve the government outside of the federal payscale.
When Booz Allen is recruiting, they have very specific experience in mind.
When there is a new solicitation for an IT contract, Booz Allen has already typically accumulated the most relevant talent with a security clearance.
Booz Allen wins “56% of new contracts” it bids on. Once Booz Allen has won a contract, its positioning becomes even stickier, winning “92% of re-competed contracts” (previous contracts up for renewal) (Form 10K)
A bid requires “ a wide variety of skills, so companies pursuing prime contracts for those projects commonly assemble a group of subcontracting firms serving as teammates with specialized capabilities” (DOJ).
Because of the difficulty in assembling talent and submitting a bid, Booz Allen is often competing with one or zero qualified bids for a contract.
The talent pool means even when Booz Allen does not have the best tech, the best tech often partners with Booz Allen, whether it’s Palantir, Nvidia, or AWS. Booz Allen has the relationships and the know-how to navigate procurement.
Booz Allen is the #1 AI provider and a leading cybersecurity contractor for the federal govt.
Booz Allen is also deeply integrated into the functions of the DOD and other military agencies, with relationships dating back 80+ years.
As the CEO Rozanski put it: “Asking why Washington needs Booz Allen is like asking why the government doesn’t build its own tanks, missiles or satellites.”
Emerging Environment for Military Tech
Rozanksi said on the last call: “this is the most bifurcated environment I have seen in my decades with Booz Allen. Our civil and national security portfolios are experiencing completely different dynamics.” Last year, defense/intel grew 5%, not enough to offset civil declines. But the setup going forward looks different…
With civil stabilized, defense doesn’t need to grow dramatically to drive overall growth and the defense funding environment is improving. Additionally, Booz Allen can move resources (technical talent) towards defense bids if new civil opportunities do not emerge.
The military has learned from the Ukraine war a need for next-gen emerging war tech including drones, cybersecurity, AI, and space.
This is not just administration talk. The One Big Beautiful Bill Act added $150B in military spending over the next decade. This will require several new contracts in areas where Booz Allen has the right to win- and has won in the past.
Defense stocks are having a great year from RTX (+60%) to defense consulting peer CACI (+30%). Booz Allen’s civil struggles have prevented it from joining the rally.
The defense spending may go beyond the OBBBA- the White House’s Genesis Mission, Golden Dome, and battleships proposals could motivate a follow-up military funding bill.
While Booz Allen is likely to receive major contracts from this environment, it is not factored into current guidance.
Weak Guide Setting Up Trade Opportunity
Booz Allen gave a weak guide for the second half of 2025:
The guide assumes “current funding and procurement trends persist through fiscal year end and therefore on-contract and new award growth relative to bookings will remain below relative to years past “ (Q2 Earnings) Despite the last quarter having several major contract wins, including a $1.5B award for countering weapons of mass destruction, the guidance “is not really based on any significant new wins [...] there’s not any material things that need to happen for us to land in this range”
So nothing could go right and Booz Allen could still hit the guide. Rozanksi took advantage of his own weak guide to buy $2M of shares at ~$85/share following the last earnings call.
Two additional factors have been weighing on the stock since earnings, despite the improving regulatory environment.
EOY tax loss selling. In a year where the markets were up double-digits, Booz Allen has been easy sell for investors looking for tax savings. This will no longer be a headwind moving forward.
The CFO is leaving in February to be the CFO of the mobility spinoff from S&P global. While this raises investor worries, S&P Global is a reputable company and the spinoff is expected to be worth $12B+. A new CFO might want to reset expectations, but in this case they’ve already been reset.
If Booz Allen returns to growth mid next-year, with midterms potentially shifting the political environment for civil spending, investors may feel comfortable getting back in. By that time BAH 0.00%↑ may have already regained much of this year’s losses.
Booz Allen is trading at 11X EV/Ebidta, 30% below its typical multiple in the last decade.
Or one can get in at the same price that the CEO bought at, with Booz Allen currently trading below $85/share.
Disclosure: Author is long BAH shares. Not investment advice - just ideas that seemed brilliant at 2am. Do your own research.