Booz Allen & Hamilton's IPO Is Highly Leveraged and Risky

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Includes: BAH, CACI, LLL, MANT
by: IPOdesktop


Booz Allen & Hamilton (NYSE:BAH) $252mm IPO - with a market cap of $2.1bb at the price range mid-point of $18 - is scheduled for Wednesday, November 17, 2010.

Conclusion

BAH is overpriced based on comparing their annualized P/E of 25x with competitors listed in their SEC filing including CACI Int'l (NYSE:CACI) at 13x P/E; L-3 Comm (NYSE:LLL) at 9x P/E; and ManTech (NASDAQ:MANT) at 12x P/E.

Minuses
Risky Income statement:

  • 98% of revenue from the US government, expected to cut federal spending.
  • Interest charges are double net profit: 3.2% vs 1.6%.
  • Operating income is only 6% of revenue for the six months ended September 30, 2010.
  • Crippled balance sheet.
  • In 2009 paid $612mm in dividends to private equity shareholders resulting in a negative tangible net worth of $586mm post-IPO.

It can’t pay dividends due to restrictive debt covenants. Plus: $11bb backlog, two years of sales

Business

  • Consulting for the US government.
  • 98% of revenue in fiscal 2010 from services provided to over 1,300 clients across the U.S. government under more than 4,900 contracts and task orders.

Dividends

  • In 2009 paid $$612mm in dividends to stockholders resulting in a negative tangible book value of $586 million.
  • Can’t pay dividends to Class A common stock holders because of “covenants in the credit agreements governing senior credit facilities and mezzanine credit facility.”

Competition
Major competitors include: (i) contractors focused principally on the provision of services to the U.S. government, such as CACI International, Inc., L-3 Communications Holdings, Inc., ManTech International Corp., SRA International, Inc., and TASC Inc.; (ii) large defense contractors which provide both products and services to the U.S. government, such as General Dynamics Corp., Lockheed Martin Corp., Northrop Grumman Corp., and Raytheon Co.; and (iii) diversified service providers, such as Accenture, Computer Sciences Corp., Deloitte Consulting LLP and SAIC, Inc.

Use of Proceeds
$230mm
Repay debt

BAH Valuation Metrics

Disclosure: none