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Booz Allen Hamilton Holding Corporation

BAH: NYSE

Booz Allen Hamilton’s (BAH) origins date back to 1914 when Edwin Booz founded one of the first management consulting firms.[1] It expanded its client base beyond commercial during World War II when Booz acted as an advisor to the Secretary of the Navy. [2] After the War, Booz continued to consult for different government agencies developing expertise in analytics, digital solutions, engineering and cyber.[3] In 2008, the company spun off its U.S. government consulting business from its commercial and international consulting businesses to form Booz Allen Hamilton. [4]

Investment thesis

We have noticed a shift in government defense spending away from tanks and troops towards defenses against national cyber security threats.[5] The President increased this year’s budget for cyber security to $15 billion, up 4% from last year, versus the typical 1% annual increase in overall defense spending.[6] We believe that Booz Allen will benefit directly from the increased spend on cyber security given its expertise in the area.

Confirmation through research

Our research led us to believe that Booz Allen is truly a value added player currently in the right part of a multi-year cycle. The company has 23,300 employees, of which, 84% hold bachelor degrees, 41% hold master’s degrees and 3% hold doctoral degrees.[7] We think having a highly educated workforce, including 700 PhD’s, is a real competitive advantage, which drives above industry average return on equity.[8] Booz Allen considers itself a partner to the government as 70% of the workforce holds security clearances, providing yet another layer of defense.[9]

We believe that sequestration put material pressure on sector growth over the last four to five years and that the period of underinvestment should lead to a long defense spending cycle, especially in cyber security. Booz appears to us to be the best player in this area. In 2016, the firm was granted the highest industry benchmark for software quality from the Capability Maturity Model Integration (CMMI) Institute.[10] It is one of only eleven Fortune 500 companies to achieve this rating.[11] Further, Booz’s customer relationships have lasted up to seventy-five years, a testament to its leadership in the industry.[12]

Variant Perception

While government consulting has typically been a cyclical business, we believe that we are early in this cycle and that a growing portion of the budget will be dedicated to cyber security. Based on our research, Booz appears to be the greatest beneficiary of this trend.