How to Profit From the U.S. Government’s Outsourced “Innovation Department”
Stock Pick: A cutting-edge technology giant nestled under the wing of the U.S. government.
The world grows more complex by the day.
Everywhere I look, it seems like a constant stream of new opportunities and threats.
Technology breakthroughs transform entire industries… cyber attacks leak millions of people’s personal info… mountains of data are analyzed in some incredible new way… and much more.
Companies across the globe are pushing the pace of innovation and there’s one massive organization that needs help keeping up… The U.S. government.
The U.S. government is comprised of many state, federal, and local agencies that need to keep pace with the broader global environment.
Whether they need a faster website… a complex data analysis… or next-level cyber defense, the U.S. government has to stay on the leading edge of technological change.
That’s where Booz Allen Hamilton (BAH) comes into play.
Booz Allen Hamilton is a management and technology consulting firm that primarily serves the U.S. government. In fact, 96% of their revenue comes from U.S. government agencies or departments.
They’ve been in the consulting business for over 100 years and have built practices around engineering, analytics, digital, defense, and cyber solutions.
With over 26,000 employees stationed in 500 locations across 25 countries, Booz Allen acts almost like an outsourced “innovation department” for the U.S. government.
Consulting on the Cutting Edge
There are four main areas where Booz Allen helps clients stay on the cutting edge:
- Cyber Defense: Protect people, organizations, and assets from cyber attacks.
- Data Analytics: Analyze large and complex data sets to distill valuable insights.
- Digital Solutions: Apply digital technologies to improve systems and processes.
- Engineering: Deliver engineering solutions that improve complex physical systems.
So what does it mean to consult in those areas?
Let’s look at a few examples of real projects Booz Allen was recently hired on:
- February, 2018 — $300M contract: The U.S. Food and Drug Administration (FDA) asked Booz Allen to help it build an Informatics Platform over the next seven years that will enable the FDA to bring life-saving drugs to market with greater speed and efficiency.
- August, 2018 — $1.03B contract: The Department of Homeland Security hired Booz Allen under the government-wide Dynamic and Evolving Federal Enterprise Network Defense (DEFEND) Program to help 13 Federal Agencies address critical cyber capability gaps and fortify the security of networks, systems, and data. This is the largest Federal task order and the second-largest cybersecurity task order in Booz Allen’s history.
- November, 2018 — $2.5B contract: The U.S. Securities and Exchange Commission (SEC) asked Booz Allen to provide comprehensive IT services over the next 10 years. They will help the SEC modernize and transform its technology to better protect investors, maintain fair, orderly and efficient markets, and facilitate capital formation.
Here’s the bottom line: When the U.S. government needs to push forward into a new frontier, it often turns to Booz Allen.
For example, President Trump recently signed a directive centralizing all military space functions under a new Space Force, which will be overseen by the Department of the Air Force.
Booz Allen has deep experience in space military operations and has already begun positioning itself as the government’s go-to consultant on space defense.
While these are some of their largest projects, Booz Allen currently has 4,700 different contracts and orders at the federal, state, local, and private enterprise level.
Their revenue breaks down like this:
- Defense (47%): Air Force, Army, Joint Combatant Commands, Navy/Marine Corps
- Civil (26%): Homeland Security, Health & Human Services, Veterans Affairs, Treasury, Justice
- Intel (23%): National Security Agency, National Geospatial Intelligence Agency, National Reconnaissance Office, Defense Intelligence Agency, Service Intelligence Centers, Intelligence Surveillance Reconnaissance Units
- Commercial (4%): Financial Services, Health and Life Sciences, Energy, Transportation
A Safe “Tech Trends” Stock
There are a few reasons I like Booz Allen stock:
First, the world is only getting more complex, which means the U.S. government will need more help navigating tomorrow’s emerging challenges. So Booz Allen should have a steady supply of projects across a wide range of areas.
To make sure they’re well positioned, Booz Allen has been pursuing its Vision 2020 growth strategy which puts a focus on technical expertise. By becoming the go-to expert in areas such as cyber security, artificial intelligence, and machine learning, Booz Allen will be well positioned for upcoming project needs.
Which leads to the second reason I like the company… their employees.
Booz Allen has built up a unique employee base that has highly relevant technical and government experience. For example, 29% of their consultants are veterans and 66% have security clearances.
This makes Booz Allen a natural fit for a wide range of military and sensitive government projects. Plus, it also makes it hard for competitors to match their unique talent pool. And in consulting, the talent is the product.
Third, with 96% of their revenue coming from the U.S. government, Booz Allen has ample opportunity for growth in private commercial projects. This is a core part of their Vision 2020 strategy, which will allow them to both grow sales and share their learnings from cutting-edge commercial projects with government clients looking to catch up.
Finally, in addition to being government-focused, Booz Allen is shareholder friendly. They offer a dividend yield near 1.5% and are expected to grow their dividend by 10% — 15% annually.
Plus, they’ve been steadily repurchasing their stock and the company recently approved a $400M increase in their repurchase program.
Most of all, I like that Booz Allen offers safe and stable exposure to dozens of fast-growing technology trends.
That said, Booz Allen definitely comes with some risks:
- With nearly all their revenue coming from U.S. government clients, a loss of credibility or a perceived decline in skill could tarnish their reputation with their main client.
- The company is sensitive to U.S. budget politics, as the departments that hire Booz Allen need approved budgets to operate. Budget stalemates or cuts could adversely affect their business.
- Defense and technology consulting are competitive areas. If Booz Allen and its peers were to get into bidding wars on government contracts and drive down prices, it could hurt their net margins, which are already single digits.
- Consulting can be an economically sensitive industry as recessions and economic slowdowns cause clients to scale back spending and postpone ambitious projects. A recession could mean slowing project work for Booz Allen.
Booz Allen Hamilton is a cutting-edge technology giant nestled under the wing of the U.S. government.
They’ve grown an impressive expertise in artificial intelligence, algorithmic warfare, machine learning, space defense, digital transformation, data analysis, and dozens of other topic areas.
Because of their workforce’s unique experience and skills, I expect they’ll be the U.S. government’s outsourced “innovation department” for years to come.
I hold no position in this stock and did not receive any payment for this independent and objective report.
Data as of June 3, 2019