Defense contractors, and in particular the specialists that run information technology (IT) systems for the federal government, have been under pressure as the effort known as the Department of Government Efficiency (DOGE) looks for ways to cut costs.
In April, DOGE began to walk back some of its initial goals, and the defense stocks moved in the other direction. Shares of Booz Allen Hamilton (BAH -0.38%), a top IT specialist, gained 14.8% for the month, according to data provided by S&P Global Market Intelligence, as investor concerns about cuts began to ease.
Questions about contracts
In theory, DOGE could be either a revenue drain or a windfall for IT specialists like Booz Allen Hamilton. On one hand, the government spends a lot of money on contractor services, and DOGE is looking for contracts to cut.
However, a lot of the business these companies do today involves work that at one time would have been done by full-time government employees. As agencies streamline, it arguably could create more opportunities for companies like Booz Allen Hamilton.
Booz shares were down about 20% for the year heading into April due largely to this uncertainty. But the stock jumped on April 2 after reports surfaced that DOGE head Elon Musk would soon be returning to his job as CEO of Tesla. Musk is still on the job in Washington but announced during Tesla’s late-April earnings call that he would soon be scaling back his government work.
There has also been a dialing back of expectations for DOGE from an initial target of about $2 trillion in annualized savings to a more modest $150 billion goal. While some of that total is still likely to come at the expense of Booz Allen Hamilton and other contractors, the smaller number is much more manageable when spread over a broad contractor base.
Is Booz Allen Hamilton stock a buy?
The truth for these companies is likely somewhere in the middle: Efforts to streamline government will both create opportunities and lead to contract cancellations. The impact could be good or bad in the near term, but over time, the growth trajectories of these businesses will be sustained.
Booz Allen, thanks to its large share of classified defense and intelligence contracts, which tend to be more sticky than basic contracts, is probably more insulated than most from massive losses.
Investors buying in today get a company that, over time, should be able to continue on a path that has led to 21% average revenue growth over the past five years. There might be a lot of turbulence along the way, but Booz Allen Hamilton remains a best-in-class government IT specialist.
Lou Whiteman has positions in Booz Allen Hamilton. The Motley Fool has positions in and recommends Tesla. The Motley Fool recommends Booz Allen Hamilton. The Motley Fool has a disclosure policy.