The Struggle Is Real For Booz Allen Hamilton

• Booz Allen Hamilton Holding Corporation’s BAH stock has increased by almost 20 percent over the past one year.
• Morgan Stanley’s Denny Galindo has downgraded the rating on the company to Underweight, while lowering the price target to $23.
• The outperformance makes the stock appear too expensive in an industry that is becoming increasingly competitive, along with uncertainties regarding the 2016 budget

According to the Morgan Stanley report, “Troop drawdowns and stagnant budgets are leading defense firms to pursue the same growing portions of the budget thereby increasing competitive pressures throughout the industry.”

The upcoming spin-offs are also likely to add to the competition for sales, making margin expansion for Booz Allen more difficult, especially given that the company has delivered annual margin expansion of 55 bps since 2010.

Investors had expected signs of a growing budget for FY16 by now. However, with no such indications, there could be unexpected added competitive pressures. On the other hand, the Street has forecasted 6 percent EPS growth through 2018, despite flat EPS growth since 2012. Galindo expects the company to be able to post EPS improvement of about 2 percent through 2018.

With EPS expected to disappoint going forward, the EPS estimates for FY16 and FY17 have been lowered.