Global Aerospace, Defense And Cyber Trends Will Spur Progress

Key Takeaways

• Surging defense demand, integration success, and leadership in cybersecurity position Thales for accelerated revenue growth and margin outperformance amid rising geopolitical and digital security needs.
  
• Advanced AI and scalable production capacities give Thales lasting competitive advantages in both defense and civil markets, boosting cash flow and long-term profitability.
  
• Dependence on volatile government spending, ESG pressures, market access barriers, Space segment underperformance, and rising competition threaten future revenue growth and margin stability.

Catalysts

Provides various solutions in the defence and security, aerospace and space, and digital identity and security markets worldwide.

• Analyst consensus expects higher defense spending to gradually support sales, but surging geopolitical risks in Europe could lead to meaningful, near-term order acceleration and capacity ramp-ups above consensus, translating to faster revenue growth and a step-change in order book visibility for multiple years.
  
• While the consensus sees recent acquisitions leading to margin headwinds from higher financial costs, the early outperformance and integration success of Imperva and Cobham AeroComms-combined with immediate synergies and high-margin growth in cyber and avionics-points to more rapid group-wide EBIT margin expansion than currently modeled.
  
• Thales' leadership in cybersecurity and digital identity, underscored by robust R&D investment and high recurring SaaS revenues, positions the company to capture outsized share in the fast-growing global digital security market, driving long-term revenue growth and sustained net margin improvement.
  
• The combination of proven production scalability and ongoing supply chain investments places Thales to fully monetize the secular demand for both defense systems and civil aerospace solutions; this unlocks tangible upside for both top-line growth and cash flow conversion if defense budgets accelerate.
  
• AI adoption and advanced autonomous systems are embedded in Thales' core products-such as radars and autonomous naval drones-providing clear competitive differentiation and setting the stage for above-peer returns on invested capital as defense and infrastructure customers modernize capabilities at scale.

Thales Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Thales compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Thales's revenue will grow by 10.7% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 4.9% today to 9.8% in 3 years time.
• The bullish analysts expect earnings to reach €2.7 billion (and earnings per share of €11.94) by about July 2028, up from €1.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 30.8x on those 2028 earnings, down from 51.2x today. This future PE is lower than the current PE for the GB Aerospace & Defense industry at 39.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.95%, as per the Simply Wall St company report.

Thales Future Earnings Per Share Growth

Risks

• The company's strong reliance on large-scale government contracts makes its revenue vulnerable to political and budgetary cycles, and ongoing ambiguity about whether recent statements from European governments will translate into actual long-term spending increases puts future order growth and top-line forecasts at risk.
  
• Heightened global focus on ethical defense spending, climate change, and ESG mandates may cause further investor divestment from defense stocks, potentially resulting in suppressed valuation multiples and higher cost of capital, which would negatively impact Thales' ability to raise funds and support future earnings growth.
  
• Technological decoupling, localization requirements, and increasing "buy local" preferences among governments may restrict Thales' access to foreign markets and drive up costs, limiting international revenue diversification and putting long-term revenue growth under pressure.
  
• The Space business experienced a negative €65 million EBIT in 2024 and remains reliant on restructuring and future project wins for recovery; continued underperformance or cost overruns in this segment would compress group net margins and could pose a sustained drag on overall earnings.
  
• Increasing competition from more agile or lower-cost entrants in areas like digital security and aerospace, coupled with the risk of defense technology commoditization and escalating cybersecurity complexity, may erode Thales' market share and pricing power, leading to pressure on revenue and contraction in net margins over the long term.

Valuation

• The assumed bullish price target for Thales is €336.96, which represents two standard deviations above the consensus price target of €273.21. This valuation is based on what can be assumed as the expectations of Thales's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €340.0, and the most bearish reporting a price target of just €220.0.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be €27.9 billion, earnings will come to €2.7 billion, and it would be trading on a PE ratio of 30.8x, assuming you use a discount rate of 6.9%.
• Given the current share price of €251.0, the bullish analyst price target of €336.96 is 25.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.