Citigroup Initiates Coverage on Booz Allen Hamilton, Notes Growth Opportunities

In a report published Sunday, Citi Research analyst Jason Gursky initiates coverage on Booz Allen Hamilton Holding Corporation (NYSE: BAH) with a Neutral rating and $19.00 price target.

Gursky noted that "Sales are down ~8% over the last 2 years, but margins are up ~300 bps as the company has managed capacity to more efficiently match demand. BAH is still investing in anticipation of growth opportunities including cybersecurity, commercial, and international, while returning 205% of FCF to shareholders since March 2012 via regular & special dividends. We don't love the demand fundamentals given the pressured US budget environment and rising risks (shorter duration awards, competition, and pricing pressure), but cash generation is resilient enough to drive continued shareholder returns via regular and special dividends."

Citi expects an approximate 120% FCF conversion through FY16E due to resilient EBITDA margins and falling capex. Gursky reported that the strong cash dynamics will likely send cash balances beyong $100 million which could result in a special dividend in addition to the regular dividend in 2014.

The analyst expects sales to fall 4% through FY16 due to the vulnerability of short-cycle services. Despite this decrease, Gursky noted that Booz Allen Hamilton "is developing capabilities to address pockets of growth within the USG (i.e. Cyber) & is growing its non-USG business in the commercial (financials, health, utilities) and international (Middle East) markets."

Booze Allen Hamilton closed at $19.15 on Friday. Today, shares have traded down as much as 1.59% at $18.85.