Shares of consulting company Booz Allen Hamilton (NYSE: BAH) fell on Friday, down as much as 5.1% before recovering a bit to a 1.7% decline as of 1 p.m. ET. The decline was notable in comparison with the S&P 500 index, which had rallied 1.3% at that time.
Booz Allen had some negative news today as a result of the Department of Defense announcing big spending cuts. The company gets virtually all of its revenue from government contracts, and the stock has sold off hard since Election Day on the expectation it would lose business.
However, are today's cuts already priced into the stock?
Pete Hegseth announces $5.1 billion in Defense Department cuts
Last night, Secretary of Defense Pete Hegseth announced $5.1 billion in cuts from the Department of Defense budget. Booz Allen was listed as one of the consulting contracts that were eliminated.
While $5.1 billion certainly sounds like a lot, only $1.8 billion of that total had been allocated to consulting companies. And of that $1.8 billion, Booz Allen was mentioned along with Accenture (NYSE: ACN), Deloitte, and "others."
On the heels of the announcement, Noah Poponak at Goldman Sachs lowered his price target on Booz Allen from $150 to $109, roughly about where the stock is now. Poponak said: "We believed the company's expertise in AI and Cyber gave it exposure to high growing and insulated areas of the Federal spend, but the company has been more negatively impacted by DOGE contract reductions than we anticipated. We see risk to estimates as results are reported in the coming quarters."
Still, given that the stock had already sold off 43% from its pre-election all-time highs, the overly negative scenario could already be priced in.
Should you buy the dip?
While the cancellation of the contract is definitely a negative, it's a good idea to keep some perspective. Over the past 12 months, Booz Allen had $11.8 billion in revenue, growing at a double-digit rate. Moreover, the company had a $39.4 billion backlog as of its January earnings report.
In that light, a mere fraction of $1.8 billion in cuts doesn't seem so bad; in fact, it seems pretty small compared with the overall business.
With the stock now trading around 16 times earnings, compared with an average in the low 20s over the past 10 years, Booz Allen Hamilton could be an interesting value opportunity, provided there aren't many more drastic cuts to its government contracts.
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Billy Duberstein and/or his clients have positions in Booz Allen Hamilton and has the following options: short December 2025 $55 puts on Booz Allen Hamilton. The Motley Fool has positions in and recommends Accenture Plc and Goldman Sachs Group. The Motley Fool recommends Booz Allen Hamilton. The Motley Fool has a disclosure policy.
