Jefferies: Booz Allen Shares Have Been Flat, And That's Why You Should Buy Them

Management consultant firm Booz Allen Hamilton Holding Corporation (NYSE: BAH) released its second-quarter results on Monday. Following the results, Jefferies looked at what the valuation of the company's shares suggests to investors.

The Analyst

The results were reviewed by Jefferies' analyst Sheila Kahyaoglu.

The Rating

Jefferies upgraded Booz Allen Hamilton shares, which have been flat over the past 12 months, from Hold to Buy and increased its price target from $36 to $44.

The upgrade was premised on the shares being undervalued when weighed against the peer-leading revenue growth prospects of the company, according to Jefferies. 

The Thesis

Booz Allen Hamilton's fiscal 2018 revenue growth guidance of 4-7 percent exceeded the expected peer growth by 2-3 times, Kahyaoglu said in a Tuesday note. The growth looks sustainable, given increases in hiring and funded backlog, the analyst said. (See Kahyaoglu's track record here.) 

Jefferies projects Booz Allen's revenue growthat  6 percent from 2018 to 2020 against peer growth of 3 percent.

The company's operating leverage is limited in the short-term, Kahyaoglu said, citing a 50 basis-point decline in adjusted operating margin in the second quarter. Higher billable expenses, increased employee costs and legal expenses connected to a DoJ investigation contributed to the contraction in margins, the analyst said.

Jefferies views these issues as transitory, as it sees scope for an expansion in operating margin from 8.5 percent in 2017 to 8.6 percent in 2018, as new employees begin to contribute to the top-line, Kahyaoglu said. 

"We believe BAH can trade at a peer and market multiple which yields our price target of $44," the analyst said, adding that the pullback in reaction to Booz Allen's results is a buying opportunity. 

The Price Action

Booz Allen Hamilton stock declined 4.01 percent on Monday in reaction to its quarterly results, after adding merely 1.47 percent in the year-to-date period.

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