Owning Booz Allen Hamilton at current levels no longer makes sense, according to Goldman Sachs. The bank downgraded shares of the defense contractor to sell from neutral. Analyst Noah Poponak also cut his 12-month price target to $94 from $108, signaling 14% downside. Shares of Booz Allen Hamilton have already stumbled 15% this year, but Goldman thinks there is more pain ahead for investors in the name. BAH YTD mountain BAH YTD chart “We see limited revenue and earnings growth over the medium-term, while valuation still has downside risk,” Poponak wrote. “We see medium-term revenue growth now closer to flat as federal civilian spending is under pressure, and priorities shift within DoD. We see risk to margins as contract structures change.” The analyst pointed out that on the top line, federal civilian agency budgets have come under pressure, with data implying that Booz Allen has been more affected by so-called Department of Government Efficiency reductions versus its competitors. In the short term, this will likely lead to flat organic revenue for the company. Meanwhile, margins in the government securities industry could continue to come under pressure especially given the industry’s highly fragmented nature. Given these materializing headwinds, Booz Allen’s current 20% premium to its peer group no longer makes sense, according to Poponak. “Historically, the premium valuation has been driven by its higher growth and margin profile, but we see more risk of a reduced growth and margin profile medium-term,” the analyst wrote. “BAH appears less insulated from sector changes than we previously believed, and therefore, we see the potential for further downside to estimates and the valuation multiple.” Shares fell more than 2% in the premarket after the downgrade.
