ESG Pressures And Supply Issues Will Impair Defense Prospects

Key Takeaways

• Growing regulatory, ESG, and supply chain pressures threaten Thales' revenue growth, delivery capabilities, and operating margins across international defense and technology markets.
  
• Heavy reliance on government orders, high R&D spending, and complex business mix increase execution risks, endangering long-term profitability and innovation leadership.
  
• Sustained global defense demand, rising digital security needs, and strategic innovation position Thales for lasting revenue growth, margin improvement, and shareholder value creation.

Catalysts

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

• Thales' future revenue growth is at risk due to heightened global regulation and scrutiny of arms exports, with increasing ESG pressures making it harder to access key international markets; this may directly suppress the top line as certain defense deals are either blocked or delayed.
  
• The company's reliance on strong order intake from political statements about rising defense budgets is highly precarious, as there remain significant delays between stated intentions and actual contracted spending; prolonged gaps or reversals in government action could restrict the expected multi-year order backlog expansion and flatten long-term revenue growth.
  
• Persistent supply chain vulnerabilities, notably continued shortages of critical electronics like PCBs, threaten Thales' ability to execute and deliver on its growing backlog, potentially leading to lower deliveries, delayed cash conversion, and expensive production bottlenecks that would erode operating margins.
  
• Thales' ambition to sustain high levels of R&D and capital spending to maintain technology leadership in digital identity and cybersecurity risks backfiring if technological shifts or competitive pressures outpace internal innovation; unsuccessful R&D investments would compress margins and stall improvements in recurring, high-margin revenue streams.
  
• The company's diversified business mix-spanning legacy avionics, digital platforms, and large-scale defense projects-creates ongoing execution risk, where any stumble in integration or adaptation (such as in Space or with recent acquisitions) could result in costly overruns, restructuring charges, and ultimately squeeze net earnings over the forecast horizon.

Thales Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Thales compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Thales's revenue will grow by 6.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 4.9% today to 8.0% in 3 years time.
• The bearish analysts expect earnings to reach €2.0 billion (and earnings per share of €9.72) 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 bearish analyst cohort, the company would need to trade at a PE ratio of 27.5x on those 2028 earnings, down from 50.2x today. This future PE is lower than the current PE for the GB Aerospace & Defense industry at 41.4x.
• 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 6.99%, as per the Simply Wall St company report.

Thales Future Earnings Per Share Growth

Risks

• Sustained global defense spending, especially in Europe and Asia amid increased geopolitical tensions, is fueling record-high order intake and providing strong visibility via a robust defense backlog, which could drive revenue growth for years to come.
  
• Persistent and rising cyber threats demand advanced security solutions, and Thales's expanding cybersecurity and digital identity portfolio-enhanced by successful integrations such as Imperva-is leading to high-margin, recurring revenues and potential expansion in net margins and EBITDA.
  
• Rapid digitalization and adoption of AI, IoT, and secure connectivity in transportation and critical infrastructure are driving demand for Thales' trusted communications, where ongoing innovation and strong R&D investment position the company to capture further top-line growth.
  
• The space segment is undergoing a transformation, with recovery of profitability underway and recent contract wins in flagship programs, suggesting Thales has the potential to restore margins and unlock new top-line growth in this long-cycle, high-barrier market.
  
• Proven ability to scale up production and talent acquisition enables Thales to respond quickly to further growth in defense orders, supporting long-term growth in revenue, strong free operating cash flow, and continued dividend progression for shareholders.

Valuation

• The assumed bearish price target for Thales is €220.0, which represents the lowest price target estimate amongst analysts. 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 more bearish 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 bearish analysts, you'd need to believe that by 2028, revenues will be €25.1 billion, earnings will come to €2.0 billion, and it would be trading on a PE ratio of 27.5x, assuming you use a discount rate of 7.0%.
• Given the current share price of €246.5, the bearish analyst price target of €220.0 is 12.0% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.