Morgan Stanley Initiates Coverage On Government Services Stocks

Booz Allen Hamilton Holding Corporation (NYSE:BAH) has been on fire in 2019, but one Wall Street analyst said Monday there is still upside in the Government Services group for selective investors.

The Analyst

Morgan Stanley analyst Matthew Sharpe initiated the following coverage on the Government Services group:

• Booz Allen Hamilton-Overweight rating, $70 price target.
• Science Applications International Corp (NYSE:SAIC)-Overweight rating, $96 price target.
• Perspecta Inc (NYSE:PRSP)-Underweight rating, $20 price target.
• CACI International (NYSE:CACI)-Equal-weight rating, $215 price target.
• Leidos Holdings Inc (NYSE:LDOS)-Equal-weight rating, $75 price target.
• Mantech International Corp (NASDAQ:MANT)-Equal-weight rating, $65 price target.
• Parsons Corp (NYSE:PSN), Equal-weight rating, $35 price target.

The Thesis

Sharpe said consistent U.S. defense budgets drive significant long-term financial visibility for these companies, generally producing 3 percent to 5 percent annual revenue growth. However, they're facing competition from Amazon.com, Inc. (NASDAQ:AMZN) and other tech companies, and the shares are mostly fully valued, up roughly 150 percent overall in the past five years.

“We take a balanced view on the Government Services industry as solid topline growth from budgets mitigates full valuation and rising competitive risks,” Sharpe wrote in the note.

Sharpe said Science Applications International is the exception, and the top pick of the group should outperform its peers due to its impressive 10 percent free cash flow yield. Sharpe is also bullish on Booz Allen Hamilton given its 8 percent to 10 percent revenue growth rate is roughly double its peer group.

At the same time, Sharpe said investors should avoid Perspecta for the time being given its extreme leverage at about four times net-debt-to-EBITDA and the risk associated with its contract renewals.

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