Digital is already transforming the private sector. Now the government is undergoing the same processes that turned entertainment media into files. New winners are emerging.
One example: The Department of Homeland Security awarded Booz Allen a $1.03 billion contract in August. The Virginia company will oversee the hardening of cybersecurity over six federal agencies.
Christopher Krebs, undersecretary of the Department of Homeland Security’s National Protection and Programs Directorate, speaks during a news conference on election cyber security, Friday, Oct. 19, 2018, in Arlington, Va. (AP Photo/Evan Vucci)ASSOCIATED PRESS
This is how it starts. Investors should get ready.
Digital really is a brave new world. Moving from analog makes systems more efficient. It facilitates machine learning, predictive analytics, and all of the other computer sciences that corporate managers promise will change business for the better.
Unfortunately, there is a dark side. For every white hat systems engineer building revolutionary new software, there is an army of black hats looking to exploit vulnerabilities. In the corporate world, exposure might mean data loss and downtime. In government, weaknesses could be the difference between life and death.
U.S. infrastructure has been ignored for decades. Electric utilities, power generation and water plants are stuck with a hodgepodge of legacy software and makeshift workarounds.
The Wall Street Journal reported in July 2018 that Russian hackers penetrated hundreds of U.S. utility control rooms using malicious code. More troubling, these facilities were supposed to be air gapped, meaning they operate on isolated networks, removed from utility company infrastructure.
Companies clearly need help with architecture and streamlining. They are motivated and incentivized to make changes. Now the government is looking to help.
Booz Allen is a unique company. As a consultancy, it has the ability to scale up and down to meet challenges large and small. It offers engineering, data analytics, consulting and cyber expertise. And it has the full blessing of the U.S. federal government.
It’s a powerful selling feature. Booz Allen can offer one-stop solutions. It can integrate architecture and reduce the number of vendors. This increases transparency and accountability.
The business has been solid. Speaking with analysts in May, CEO Horacio Rozanski noted the company exceeded $6 billion in sales for the first time in fiscal 2018. It had the best organic growth in the sector, and highest earnings since becoming a public company. Booz Allen also accelerated headcount growth.
While increasing payrolls might seem counterproductive, hiring consultants translates to increased billable hours and higher profits. It is a very good thing.
During the fiscal year ended May, revenue grew 6.3% year-over-year to $6.17 billion. Headcount grew by 1,300, and total order backlog expanded to $16 billion, an 18% increase year-over-year. Earnings surged 21.8% to $303.2 million.
Booz Allen’s market capitalization is $7.4 billion. The stock has been strong, rising 36.2% this year. However, shares trade at 18.6x forward earnings. And government funding is only beginning to flow.
This is the start of something big. Longer-term investors should buy the stock on the next pullback.