Company Reports

Wide-moat Thales reported strong first-quarter results, ahead of management guidance. Our fair value estimate is unchanged.

Thales' business is well diversified with 48% of revenue coming from civil and 52% from defense. Escalating global security concerns, intensified by the conflict in Ukraine, are driving structurally higher growth in the defense market. We anticipate this growth will be uninterrupted for at least several years, considering that many countries, particularly in Europe, have underspent since the end of the Cold War. Thales group is strategically positioned to benefit, given its significant stakes in a broad array of major international defense projects. Thales derives approximately 68% of its defense revenue from Europe, and we expect the collective defense budget there to increase by almost 35% in the next five years.

Wide-moat Thales reported strong 2023 results, ahead of management guidance. Our fair value estimate is unchanged.

Wide-moat Thales reported third-quarter 2023 results aligning with company-compiled consensus. Our fair value estimate is unchanged.

We see Oct. 9, 2023's sudden price increase in defense stocks as an overblown and simplistic reaction to the outbreak of war in Israel and Gaza. As we have pointed out before, the dots between military combat and the profit of a defense contractor do not connect nearly as directly as they seem to in the investing public's imagination. We will not alter our ratings or valuations of defense contractors in light of this news, and we believe long term development and resupply of missile defense technology are already baked sufficiently into our forecasts.

Thales' business is well diversified with 48% of revenue coming from civil and 52% from defense. Escalating global security concerns, intensified by the Ukraine conflict, are driving structurally higher growth in the defense market. We anticipate this growth will be uninterrupted for at least several years, considering that many countries, particularly in Europe, have underspent since the end of the Cold War. Thales group is strategically positioned to benefit, given its significant stakes in a broad array of major international defense projects. Thales derives approximately 68% of its defense revenue from Europe, and we expect the collective defense budget there to increase by almost 35% in the next five years.

Narrow-moat Thales reported strong first-half 2023 results, aligning with company-compiled consensus. Our fair value estimate is unchanged.

Narrow-moat Thales reported a solid set of results for financial 2022, broadly in line with company-compiled consensus. EBIT at EUR 1.9 billion, increased by 17% with margins expanding 80 basis points to 11%. The results were driven by the continued recovery of aerospace, resilient margins in defense and security, and above-target margins in the digital identity and security segment. The group upgraded its free cash flow conversion target for 2023 to 130%, from 115% previously, as it anticipates early payments from customers and a strong order flow especially in emerging markets. Guidance for 2023 is in line with company-compiled consensus with midpoint sales at EUR 18.3 billion and a margin of 11.7%, implying mid-single-digit growth in EBIT. Growth over the medium term is expected to be supported by maintained growth of defense budgets and further recovery of air traffic. This remains broadly in line with our forecast, so we don’t expect to make any material changes to our EUR 135 fair value estimate.

Thales has attractive positions in European and international defense markets and will benefit from growth in commercial aerospace. We were originally skeptical by the 2019 Gemalto acquisition, but the integration seems to be going according to plan.

Thales has attractive positions in European and international defense markets and will benefit from growth in commercial aerospace. We were originally skeptical by the 2019 Gemalto acquisition, but the integration seems to be going according to plan.

Narrow-moat Thales carried the momentum from the first half into the third quarter. Organic order intake and sales in the third quarter were up 36% and 8.5%, respectively. Reported sales growth of 13.7% benefited from the strong U.S. dollar as a large share of the group’s sales are denominated in USD. Management upgraded organic sales growth guidance for the full year to the previous upper end of the range at 5.5%, while midpoint EBIT margin guidance remains unchanged at 11%. The group is well positioned over the medium term—the defense business will benefit from multiyear increases in defense budgets while the civil aerospace and digital identity and security segments will see a cyclical upswing after two years of depressed demand. The sale of the transport business will result in a more focused portfolio.

Narrow-moat Thales booked a record first-half order intake of EUR 11.2 billion, up 43% year on year, driven by the finalization of the order for 80 Dassault Rafale jets by the United Arab Emirates in the second quarter. Group EBIT increased by 23% year on year to EUR 891 million as all segments increased margins. Free cash flow more than doubled, aided by the down payment for the UAE order, driving net debt down further to EUR 894 million, from EUR 2.5 billion a year ago. Despite looming supply chain challenges, management slightly upgraded full-year sales growth guidance to a midpoint of 4.5%, from 4% previously, and maintained margin guidance at a range of 10.8% to 11.1%. The group is well positioned over the medium term—the defense business will benefit from multiyear increases in defense budgets while the civil aerospace and digital identity and security segments will see a cyclical upswing after two years of depressed demand. The sale of the transport business will result in a more focused portfolio.

Narrow-moat Thales’ first-quarter 2022 sales and order update is in line with expectations. Order intake for the first quarter is down 6% organically, driven by growth in aerospace and digital identity and security, or DIS, which was offset by lower defense orders due to large orders booked in the comparative period last year. Group sales increased by 2.7% organically, driven by strong DIS performance and ongoing momentum in space sales. Midpoint sales growth for 2022 of 4% was maintained while margins are still expected to be in the 10.8% to 11.1% range for the full year. Over the medium term, sales and profitability will be driven by the recovery in the aeronautics business and increased defense spending, which we have recently factored into our forecasts. Shares are currently trading at a slight discount to our EUR 130 fair value estimate and are nearing fair value.

Thales has attractive positions in European and international defense markets and will benefit from growth in commercial aerospace. We were originally skeptical by the 2019 Gemalto acquisition, but the integration seems to be going according to plan.

We increase narrow-moat Thales’ fair value estimate by 13% to EUR 130 per share from EUR 115 per share. Increased defense spending in the group’s core markets is the key driver behind the rise in our fair value estimate. The group’s defense and security business (54% of group sales) is the number-one supplier in Europe of sensors and mission systems for a range of aircraft, ships, and military vehicles. Thales’ products are well represented on the highly successful Dassault Rafale fighter jet, which is successful in domestic French and export markets. We believe the heightened security risk in Europe, in conjunction with several announcements of increased defense budgets over the medium term, will benefit Thales. We increase our forecast growth rate for the segment over the five-year explicit period to 6% per year, from 4% previously. The share price has increased by 60% year to date and currently only offers moderate upside to our updated fair value estimate.

Narrow-moat Thales reported a solid set of results for financial 2021. The group significantly upgraded its medium-term free cash flow conversion guidance to 115%, from 95% previously, as it anticipates strong order flow. Order intake for the year excluding the transport business, which is up for disposal, grew by 18% to EUR 19.9 billion driven by a particularly strong fourth quarter, which includes 12 large orders and growth across mature and emerging markets. EBIT increased by 32% with margins increasing 200 basis points to 10.2%, driven by momentum in the defense segment, a return to profitability in the aerospace segment and cost synergies from the integration of digital identity and security. The group is guiding for 2022 midpoint sales of EUR 17 billion and a margin of 11%, implying midteen growth in EBIT. Growth over the medium term will be underpinned by increases in defense budgets, renewed growth in space and a recovery in the aviation markets.

Germany’s boost in defense spending, announced Feb. 27, will benefit most European defense contractors and could lead to multiyear increases in the growth outlook for these companies. While it is early days and very difficult to quantify the exact impact, we expect to make positive adjustments to our defense coverage. Of the pure-play defense names, narrow-moat Thales, Dassault, and Leonardo trade at discounts to our fair value estimates while wide-moat BAE Systems trades at a premium. We don’t believe our revisions will change this ranking by much, and our preference is for Thales and Dassault. Despite the impact from a demand and cost perspective on the airline and commercial aerospace companies we cover, we don’t foresee any structural long-term changes to their prospects and as such don’t anticipate any major changes to our fair value estimates. We maintain our preference for wide-moat Safran and no-moat Wizz Air under our aerospace and airline coverage, respectively.

Narrow-moat Thales reported organic order intake and sales growth of 28% and 6%, respectively for the first nine months of the year, with the order intake now back above 2019 levels. The figures exclude the transport segment, which is up for disposal. Several large military and space orders booked year to date are the key driver behind the growth in order intake, while the civil aeronautics business remains depressed. Guidance for the full year remains unchanged, with the group expecting midpoint sales (excluding the transport business) of EUR 16 billion and an EBIT margin of 10%, which is in line with our estimates. The main sales and profit drivers over the medium term will be the continued momentum of the defense and space markets and gradual recovery of the civil aeronautics and biometrics markets. We maintain our EUR 115 fair value estimate and believe the shares are offering good value at current levels.

Thales has attractive positions in European and international defense markets and will benefit from growth in commercial aerospace. We were originally skeptical by the 2019 Gemalto acquisition, but the integration seems to be going according to plan.

Thales has attractive positions in European and international defense markets and will benefit from growth in commercial aerospace. We were originally skeptical by the 2019 Gemalto acquisition, but the integration seems to be going according to plan.