Booz Allen Shares And The 'Trump Bump': Higher Defense Budgets To Benefit Stock

Brian Ruttenbur of Drexel Hamilton maintains his Buy rating on Booz Allen Hamilton Holding Corporation BAH shares as the company is expected to benefit from potential increase in defense budgets and corporate tax reform under the Trump presidency.

Rating Justification: The Trump Bump

“We believe the likely increases will benefit the government services group and BAH specifically,” analyst Ruttenbur wrote in a note.

Ruttenbur believes the Trump administration will look to outsource more with government services providers, as past studies have shown that government services providers end up saving the government money over time.

The analyst also expects government contractors to be called upon to boost capabilities of cyber/IT infrastructure and intelligence agencies.

Further, the government service providers would benefit from potential reduction in small business set-asides and likely elimination of sequestration.

Importantly, the potential trimming of corporate taxes would significantly help Booz Allen, which pays a full tax rate of 39 percent.

“If the new administration is successful in cutting corporate taxes, then BAH would be a major beneficiary. Lowering the tax rate to 20 percent would take our EPS estimate in FY'18 (March) from $1.82 to $2.34 and free cash flow from $266 million to $343 million,” Ruttenbur highlighted.

As such, the analyst raised his price target to $44 from $37.

At time of writing, shares of Booz Allen were up 0.81 percent to $36.30.