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Booz Allen's Top-Secret Profit Machine

Booz Allen's Top-Secret Profit Machine
Bloomberg View
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Bloomberg View:

Psst, here's a stock tip for you. There's a company near Washington with strong ties to the U.S. intelligence community that has been around for almost a century and has secret ways of making money -- so secret that the company can't tell you what they are. Investors who buy just need to have faith.

To skeptics, this might seem like a pitch for an investment scam. But as anyone who has been paying attention to the news might have guessed, the company is Booz Allen Hamilton Holding Corp.

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Booz Allen is the government contractor that employed Edward Snowden when he leaked a trove of secret documents about National Security Agency surveillance programs to the U.K.'s Guardian newspaper and the Washington Post. The consulting company, based in McLean, Virginia, is upfront about the ways in which its silence creates risks for shareholders. It derives 99 percent of its revenue from the U.S. government and says a substantial portion of its contracts are classified.

"Because we are limited in our ability to provide information about these contracts and services," the company said in its latest annual report, "you may not have important information concerning our business, which will limit your insight into a substantial portion of our business, and therefore may be less able to fully evaluate the risks related to that portion of our business."

This seems like it would be a dream arrangement for some corporations: Not only is Booz Allen allowed to keep investors uninformed, it's required to. I suppose we should give the company credit for being transparent about how opaque it is.
Booz Allen shares were down 4 percent to $17.35 this afternoon, a bit higher than what they sold for when the company held its initial public offering in November 2010. About two thirds of Booz Allen's shares are owned by the Washington-based private-equity firm Carlyle Group LP. The company had net income of $219 million on revenue of $5.8 billion in the year ended March 31. It has a stock market value of $2.5 billion.

Booz Allen predicted something like this might happen. "Employee or subcontractor misconduct could also involve the improper use of our clients' sensitive or classified information," the company said in its annual report. "It is not always possible to deter employee or subcontractor misconduct, and the precautions we take to prevent and detect this activity may not be effective in controlling unknown or unmanaged risks or losses, which could materially harm our business."

No kidding. One question on a lot of people's minds is how a 29-year-old consultant could have access to so much secret information at the NSA. Don't expect Booz Allen to volunteer much insight. My guess is that the information is classified.

We often hear about conflicts that arise between the First Amendment right of the press to report the news and the government's obligation to protect citizens. There also is a powerful tension between the government's demands for secrecy and investors' need for important information about companies with publicly held securities.

Last week, for instance, Slate carried an article under this headline: "How PRISM could ruin Apple, Google, and every other big tech company." Although I'm not convinced that the companies are doomed, I have no doubt that their cooperation with the NSA creates significant risks for shareholders.

How are the companies supposed to explain these risks? They probably can't, at least not in any meaningful sense. U.S. securities rules prohibit companies from filing any disclosures with the Securities and Exchange Commission that contain classified information.

There's no easy solution here, aside from the obvious point that the government keeps way too many secrets. It's just another risk that investors need to keep in mind: Even if a company is required to disclose material information publicly, that doesn't mean it will be allowed to do so.

(Jonathan Weil is a columnist for Bloomberg View. Follow him on Twitter.)

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Before You Go

Companies Profiting Most From War: 24/7 Wall St.
10. United Technologies(01 of10)
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Arm sales 2011: $11.6 billionTotal sales 2011: $58.2 billionTotal profit: $5.3 billionTotal employment: 199,900Sector: Aircraft, electronics, enginesUnited Technologies makes a wide range of arms — notably military helicopters, including the Black Hawk helicopter for the U.S. Army and Seahawk helicopter for the U.S. Navy. The company was the most profitable of all companies on this list, making more than $5.3 billion in 2011. It was also the largest company on this list by headcount, employing nearly 200,000 people worldwide as of 2011. Arms comprised just 20% of the company’s $58.2 billion in sales in 2011. Other products made by United Technologies include elevators, escalators, air-conditioners and refrigerators. International sales comprised 60% of the company’s total revenue in 2012.Read more at 24/7 Wall St. (credit:Getty Images)
9. L-3 Communications(02 of10)
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Arm sales 2011: $12.5 billionTotal sales 2011: $15.2 billionTotal profit: $956 millionTotal employment: 61,000Sector: ElectronicsSome 83% of L-3 Communications sales in 2011 came from arms sales, totaling just over $12.5 billion. This was down, however, from about $13.1 billion in arms sales in 2010. The company has four different business segments: electronic systems; aircraft modernization and maintenance; national security solutions; and command, control, communications, intelligence, surveillance and reconnaissance. Among many products manufactured, the company has become a major provider of unmanned aircraft systems. In 2011, the company turned a profit of $956 million and employed approximately 61,000 people.Read more at 24/7 Wall St. (credit:AP)
8. Finmeccanica (03 of10)
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Arm sales 2011: $14.6 billionTotal sales 2011: $24.1 billionTotal profit: $-3.2 billionTotal employment: 70,470Sector: Aircraft, artillery, engines, electronics, military vehicles, missiles, small arms/ammunitionItalian company Finmeccanica makes a wide range of arms, including helicopters and security electronics. Of the company’s nearly $24.1 billion in sales in 2011, 60% were in arms. Finmeccanica lost $3.2 billion in 2011. The Italian company is currently fending off allegation that it paid bribes to win an approximately $750 million contract to provide 12 military helicopters to the Indian government back in 2010. The then-head of the company, Giuseppe Orsi, was arrested in February but has denied wrongdoing. Other executives, including the head of the company’s helicopter unit, have been replaced, and the company has delayed the release of recent financial results until the situation is resolved.Read more at 24/7 Wall St. (credit:AP)
7. EADS (04 of10)
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Arm sales 2011: $16.4 billionTotal sales 2011: $68.3 billionTotal profit: $1.4 billionTotal employment: 133,120Sector: Aircraft, electronics, missiles, spaceThe European Aeronautic Defence and Space Company (EADS), based in the Netherlands, had $16.4 billion worth of arms sales in 2011, roughly in line with 2010. Arms sales, however, comprised just 24% of the company’ entire sales, which totaled about $68.3 billion in 2011. EADS and BAE Systems attempted to merge for $45 billion in 2012, which would have created the world’s largest aerospace company. However, the deal collapsed in October after German Chancellor Angela Merkel expressed concern that the new company would marginalize the influence of the German government and would focus decision making in France and the U.K.Read more at 24/7 Wall St. (credit:AP)
6. Northrop Grumman(05 of10)
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Arm sales 2011: $21.4 billionTotal sales 2011: $26.4 billionTotal profit: $2.1 billionTotal employment: 72,500Sector: Aircraft, electronics, missiles, ships, spaceLike many of the companies on this list, Northrop Grumman makes a wide range of arms, including unmanned systems; air and missile defense radars; and critical incident response systems. In 2011, Northrop Grumman reported about $21.4 billion in arms sales, comprising 81% of the company’s $26.4 billion in total sales. But arms sales in 2011 declined from $28.2 billion in arms sales in 2010, after growing by $3.5 billion between 2007 and 2010. The company attributed the decline to reduced government spending on defense projects. Nevertheless, the company reported a profit of more than $2.1 billion in fiscal 2011, slightly better than the company’s earnings the previous year.Read more at 24/7 Wall St. (credit:AP)
5. Raytheon(06 of10)
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Arm sales 2011: $22.5 billionTotal sales 2011: $24.9 billionTotal profit: $1.9 billionTotal employment: 71,000Sector: Electronics, missilesRaytheon, based in Waltham, Mass., is one of the largest defense contractors in the U.S. The company makes a wide range of defense products, including missiles such as the Tomahawk Cruise Missile. Arms sales totaled about $22.5 billion in 2011, comprising about 90% of the company’s total sales that year. However, these sales were down slightly from the $23 billion in arms sales in 2010.The slide hasn’t let up. Total sales in 2012 fell 1.5%, and Raytheon is expecting sales to fall 3% in 2013, a projection which doesn’t take into account the effects of sequestration on the company. Fortunately, the company can rely on overseas customers to somewhat offset weak sales at home. As of January, approximately 40% of the company’s backlog was booked overseas. The company expects approximately a 5% increase in international sales in 2013.Read more at 24/7 Wall St. (credit:AP)
4. General Dynamics(07 of10)
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Arm sales 2011: $23.8 billionTotal sales 2011: $32.7 billionTotal profit: $2.5 billionTotal employment: 95,100Sector: Artillery, electronics, military vehicles, small arms/ammunition, shipsWith 18,000 transactions worth $19.5 billion in 2011, General Dynamics was the third-largest contractor to the U.S. government. Of those contracts, approximately $12.9 billion worth went to the Navy, while an additional $4.6 billion went to the Army. The company reported just under $23.8 billion in arms sales in 2011, comprising 73% of the company’s total sales. Arms sales in 2011 were slightly below 2010 levels. The company employs approximately 95,000 workers worldwide and makes a host of products, including electric boats, tracked and wheeled military vehicles, and battle tanks. The company has expressed concern about the potential effects on U.S. military budgets due to sequestration, issuing layoff notices this week.Read more at 24/7 Wall St. (credit:AP)
3. BAE Systems(08 of10)
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Arm sales 2011: $29.2 billionTotal sales 2011: $30.7 billionTotal profit: $2.3 billionTotal employment: 93,500Sector: Aircraft, artillery, electronics, military vehicles, missiles, small arms/ammunition, shipsBAE Systems was the largest non-U.S. company based on arms sales, bringing in $29.2 billion worth in 2011. This represented 95% of the company’s total sales that year. Yet 2011’s arms sales were lower than 2010′s, when the company sold $32.9 billion worth of arms. The products that BAE sells include the L-ROD Bar Armor System that shields defense vehicles, and the Hawk Advanced Jet Trainer that provides sophisticated simulation training for military pilots. In 2013, the company said its growth would likely come from outside the United States and Great Britain — its home market. BAE noted that its outlook for those two countries was “constrained,” likely due to the diminished presence in international conflicts and government budget cuts.Read more at 24/7 Wall St. (credit:AP)
2. Boeing (09 of10)
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Arm sales 2011: $31.8 billionTotal sales 2011: $68.7 billionTotal profit: $4.0 billionTotal employment: 171,700Sector: Aircraft, electronics, missiles, spaceBoeing was the second-largest U.S. government contractor in 2011, with about $21.5 billion worth of goods contracted that year. The Chicago-based company makes a wide range of arms, including strategic missile systems, laser and electro-optical systems and global positioning systems. Despite all these technologies, just 46% of the company’s total sales of $68.7 billion in 2011 came from arms. Boeing is the largest commercial airplane manufacturer in the world, making planes such as the 747, 757 and recently, the 787 Dreamliner. The company is also known for its space technology — Boeing had $1 billion worth of contracts with NASA in 2011.Read more at 24/7 Wall St. (credit:AP)
1. Lockheed Martin (10 of10)
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Arm sales 2011: $36.3 billionTotal sales 2011: $46.5 billionTotal profit: $2.7 billionTotal employment: 123,000Sector: Aircraft, electronics, missiles, spaceLockheed Martin notched $36.3 billion in sales in 2011, slightly higher than the $35.7 billion the company sold in 2010. The 2011 arms sales comprised 78% of the company’s total 2011 sales of $46.5 billion. As of 2011, the company employed 123,000 people worldwide. In the company’s aerospace and defense unit, Lockheed makes a wide range of products, including aircrafts, missiles, unmanned systems and radar systems. The company and its employees have been concerned about the effects of both the fiscal cliff and sequestration, the latter of which includes significant cuts to the U.S. Department of Defense. In the fall of 2012, the company planned on issuing layoff notices to all employees before backing down at the request of the White House.Read more at 24/7 Wall St. (credit:AP)
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