Booz Allen Hamilton: Navigating Layoffs to Seize Defense and AI Growth

Booz Allen Hamilton (NYSE: BAH) is undergoing a pivotal transformation. While headlines focus on its recent decision to lay off 7% of its workforce—a move targeting the struggling civil division—the company's broader strategy paints a compelling picture of long-term resilience and growth. By realigning its resources toward high-margin defense and intelligence sectors, paired with accelerating investments in artificial intelligence (AI), Booz Allen is positioning itself to capitalize on secular trends in government technology spending. For investors, this restructuring presents a rare opportunity to buy a leader in national security and AI integration at a discounted valuation.

A Strategic Shift, Not a Cost-Cutting Exercise

The layoffs—primarily in the civil division, which accounts for 35% of revenue—are not merely a reaction to federal spending cuts. They are a calculated move to pivot toward markets with clearer growth trajectories. The civil sector faces a projected "low double-digit" revenue decline in 2026 due to slower government procurement, but this is a temporary headwind. Meanwhile, the defense and intelligence divisions—representing 64% of 2025 revenue—continue to thrive. These segments grew 14% in the latest quarter, driven by demand for missile defense systems, space modernization, and AI-powered solutions for border security and electronic warfare.

The company's backlog of $37 billion (up 15% year-over-year) underscores its confidence in sustained demand. Notably, new defense contracts totaling $1.2 billion with the National Geospatial-Intelligence Agency and Air Force signal that BAH's strategic bets are paying off. CEO Horacio Rozanski emphasized: “We're reallocating resources to where the future is.”

Valuation: A Discounted Leader in High-Growth Markets

Booz Allen's stock has been punished by short-term concerns, dropping 12% pre-market after its May earnings report. Yet the fundamentals suggest this is a buying opportunity.

Key metrics paint a bullish case:
- EV/EBITDA of 9.23: This is well below its five-year average of 13.9 and the industry median of 10.7, implying the market is undervaluing BAH's profitability.
- PEG Ratio of 1.85: While above the industry median (1.25), this reflects the company's 9.5% five-year EBITDA growth rate. Analysts at Wells Fargo argue that the PEG discount is “overdone” given BAH's AI-driven revenue growth (up 30% to $800 million in 2025).
- ROE of 15.4%: Among peers like Leidos and TransUnion, BAH's return on equity is among the highest, signaling efficient capital allocation.

The stock trades at just 16.4x forward earnings, compared to its five-year average of 19.5x. Even with 2026's conservative guidance ($12–12.5 billion revenue), BAH's valuation offers a margin of safety.

Catalysts for a Turnaround: AI and Defense Dominance

Two trends will drive BAH's recovery:
1. AI Integration: BAH's AI revenue grew 30% in 2025, and Rozanski has called it a “foundational capability”. The company's partnerships with commercial tech firms (e.g., Amazon Web Services, Microsoft) allow it to deliver AI solutions tailored for harsh environments like space or combat zones. This is a $300 billion market, and BAH is already winning contracts—its AI division now accounts for 6% of total revenue, up from 3% in 2022.

1. Defense Modernization: The Pentagon's push to upgrade legacy systems and adopt “Agentic AI” (AI that operates autonomously in dynamic environments) is a tailwind. BAH's work on the Air Force's AI-powered logistics system and the Missile Defense Agency's hypersonic tracking programs are prime examples of its expertise in this space.

Risks and Considerations

• Political Uncertainty: Federal spending priorities could shift under a new administration, though defense spending historically enjoys bipartisan support.
• Margin Pressures: Layoff savings must offset investments in AI and defense. BAH's 2026 EBITDA margin guidance (11%) is flat, but its free cash flow (projected at $700–800 million) remains robust.

The Bottom Line: A Strategic Buy at a Strategic Price

Booz Allen Hamilton is not just surviving restructuring—it's reinventing itself as a pure-play defense and AI powerhouse. With a backlog that guarantees visibility into 2027, a valuation that ignores its growth drivers, and a secular tailwind in government tech spending, BAH offers a rare combination of safety and upside.

Investors should act now: The stock's 19% decline over the past year has created a compelling entry point. While short-term volatility remains, the long-term trajectory is clear. BAH is primed to outperform as defense budgets grow and AI becomes the backbone of national security.

Final Verdict: Buy Booz Allen Hamilton. The restructuring pain is temporary; the upside in defense and AI is permanent.