Executive Summary & Strategic Assessment

Thales SA is a global technology leader operating at the nexus of high-growth, high-barrier-to-entry markets: Defence & Security, Aerospace, and Digital Identity & Security.¹ The company’s strategic positioning has been significantly fortified through a portfolio realignment that divested lower-margin transportation assets while scaling its core technology segments, notably through the acquisitions of Imperva and Cobham AeroComms.¹ This has sharpened its focus on capitalizing on powerful secular tailwinds, including a global defense spending supercycle, a resilient recovery in commercial aerospace, and the structural expansion of the digital economy.

Financially, Thales has demonstrated a period of robust and accelerating performance. For the fiscal year 2024, the company surpassed the €20 billion sales threshold, driven by strong organic growth of 8.3%, which exceeded market expectations.³ A key indicator of future performance, the order backlog, reached a record level of nearly €51 billion, providing exceptional multi-year revenue visibility, particularly within the foundational Defence & Security segment.³ Profitability has been steadily improving, with the adjusted EBIT margin reaching 11.8% in 2024.⁴ However, the company’s most distinguished financial characteristic is its outstanding cash generation. For the fifth consecutive year, the free operating cash flow conversion ratio surpassed 100%, a testament to strong working capital management and the favorable cash cycle of its long-term defense contracts.³

The forward-looking analysis is shaped by several dominant themes. The primary driver is the unprecedented increase in global military expenditure, spurred by geopolitical tensions, which directly fuels Thales’s largest and most profitable segment.⁵ Concurrently, the sustained recovery in global air traffic provides a stable demand environment for the Avionics business.⁷ A core strategic challenge and opportunity lies in the Digital Identity & Security (DIS) segment, where the company aims to leverage its expanded portfolio to capture a leading share of the fast-growing cybersecurity market.¹ Internally, management faces the critical task of restoring profitability in its Space division, which has been a drag on the otherwise strong performance of the Aerospace segment.¹

Overall, Thales SA presents the profile of a well-managed, technologically advanced industrial firm that is strategically aligned with strong, long-term market trends. Its record backlog offers a defensive quality and high degree of predictability. Nevertheless, its operational performance remains subject to the inherent risks of government budget cycles, complex program execution, and a volatile geopolitical landscape. The company’s market valuation appears to reflect a significant degree of optimism regarding its future prospects, placing a high premium on flawless execution of its ambitious 2028 strategic plan.

Company Overview & Business Model

Thales SA operates a diversified yet technologically synergistic business model organized into three primary segments. This structure is designed to leverage core technology competencies across different end markets, creating a resilient portfolio that balances long-cycle government contracts with more cyclical commercial activities and high-growth digital markets.

Segment Breakdown

Defence & Security (D&S)

The Defence & Security segment is the historical cornerstone of Thales and its largest contributor to revenue and profit. It provides a vast array of high-technology systems and services to armed forces, governments, and critical infrastructure operators worldwide. The portfolio is heavily weighted towards electronics, software, and systems integration rather than large-scale platforms, positioning Thales as a critical technology enabler for its partners.⁹

Key activities within this segment include:

• Radar and Sensor Systems: Development and manufacturing of advanced air, land, and naval radar systems, including the Ground Master family, as well as sonar systems for submarines and surface ships.
• Mission Systems: Integration of complex command and control (C4I) systems, electronic warfare suites (such as the SPECTRA system for the Rafale fighter jet), and avionics for military aircraft.¹⁰
• Secure Communications and Information Systems: Provision of tactical radios, satellite communication systems, and cybersecurity solutions for military and government clients.
• Missile Systems: Through its participation in consortia like Eurosam, Thales is involved in the production of air defense systems, such as the ASTER family of missiles.³

The D&S segment is the primary beneficiary of the current upswing in global defense spending. In fiscal year 2024, it recorded an order intake of €14.7 billion, achieving a book-to-bill ratio of 1.34, which signifies that orders are being won significantly faster than revenue is being recognized.³ This has expanded its segment-specific order book to a record level, providing over three years of revenue visibility.¹

Aerospace

The Aerospace segment serves both civil and military markets and is composed of two distinct business lines: Avionics and Space.

• Avionics: Thales is a leading global supplier of on-board electronic equipment and systems for commercial, regional, business, and military aircraft. Its offerings include integrated flight decks (“glass cockpits”), flight management systems, navigation and surveillance systems, and electrical power conversion systems. A significant and historically profitable part of this business is In-Flight Entertainment and Connectivity (IFEC), where Thales provides seat-back screens and satellite connectivity solutions to major airlines.³ This sub-segment’s performance is closely tied to the health of the commercial aviation market, benefiting from both new aircraft production rates (line-fit) and the maintenance and upgrade cycle of the existing global fleet (aftermarket). The post-COVID recovery in air traffic has been a significant tailwind, with civil aviation aftermarket activities showing particularly strong organic growth of over 30% in 2023.¹¹
• Space: Operating primarily through the Thales Alenia Space joint venture (67% Thales, 33% Leonardo), this business designs and manufactures satellites and space systems for a range of applications, including telecommunications, Earth observation, navigation (e.g., Galileo), and scientific exploration.¹⁰ This business has faced significant headwinds recently. The 2023 results highlighted challenges including “delays in the execution of several contracts due mainly to supply difficulties” and an “overall fall in demand…for geostationary communications satellites”.¹¹ This reflects a broader market shift away from traditional large geostationary satellites towards constellations of smaller Low Earth Orbit (LEO) satellites, a market segment where competition is intense. Management has explicitly stated that the focus for the Space business is on restoring profitability rather than chasing top-line growth.¹

Digital Identity & Security (DIS)

This segment represents Thales’s strategic push into high-growth digital markets. Formed largely from the acquisition of Gemalto in 2019 and significantly scaled with the purchase of Imperva in 2023, DIS focuses on providing trusted digital solutions for companies, governments, and individuals.

Key activities include:

• Cybersecurity Services: A broad portfolio of solutions including data protection (encryption, key management), application security (via Imperva), and cloud security services.
• Biometric and Identity Solutions: Production of secure identity documents like passports and national ID cards, as well as biometric verification systems for border control and law enforcement.
• Smart Cards and Digital Payments: Manufacturing of EMV payment cards for banks and SIM cards for mobile network operators, although this is a more mature part of the portfolio.

The business model in DIS is distinct from the other segments. While D&S is characterized by very long-term projects, DIS operates on shorter sales cycles with a higher proportion of recurring revenue, particularly in its software and services offerings. Consequently, its book-to-bill ratio is structurally close to 1.0, as revenue is recognized much more quickly after an order is placed.⁴ This structural difference has implications for financial forecasting and working capital. As the DIS segment grows as a proportion of the Group’s total revenue, it should contribute to a more stable and predictable quarterly revenue cadence and could potentially improve the overall cash conversion cycle by reducing the amount of capital tied up in long-duration projects.

Revenue Mix and Geographic Exposure

In fiscal year 2024, Thales generated total sales of €20.6 billion.⁴ While the company does not provide a precise sales breakdown for 2024 in the available documents, the order intake figures offer a clear picture of the business’s composition and direction. Of the €25.3 billion in new orders, Defence & Security was the largest contributor with €14.7 billion, followed by Aerospace with €6.4 billion.³

Geographically, Thales maintains a balanced global footprint. In 2024, mature markets (Europe, North America, Australia) remained the largest source of business, accounting for €19.0 billion in order intake.⁴ However, the most significant growth came from emerging markets, where orders surged by 39% on an organic basis to €6.3 billion, driven by strong momentum in the Middle East, which saw an 80% organic increase.³ This highlights a dual-engine growth model: a stable, well-established base in mature markets complemented by high-growth opportunities in emerging regions.

Strategic Rationale of Diversification

Thales’s diversified portfolio is a core element of its strategy, designed to deliver resilience, synergy, and exposure to multiple growth vectors.

• Resilience: The model provides a natural hedge against cyclicality. The Defence & Security business, funded by long-term government budgets, offers stability and exceptional revenue visibility that can offset downturns in the more economically sensitive commercial Aerospace market, as was clearly demonstrated during the COVID-19 pandemic.
• Synergy: A key competitive advantage stems from the company’s “dual-use” technology strategy. Core technological capabilities in areas such as sensors, cybersecurity, artificial intelligence, and satellite communications are developed centrally and then adapted for both military and civil applications. For example, cybersecurity expertise developed in the DIS segment is critical for securing the flight control systems in the Avionics segment and the command-and-control networks in the D&S segment. This approach allows R&D costs to be amortized over a much broader revenue base and fosters more rapid innovation than would be possible for a pure-play competitor.
• Growth Exposure: The three-pillar structure provides exposure to distinct but complementary market drivers. D&S is driven by geopolitical risk, Aerospace by economic growth and travel demand, and DIS by the inexorable trend of digitalization. This allows the Group to capture growth from multiple, often uncorrelated, secular trends.

Industry Dynamics & Market Environment

Thales’s performance is intrinsically linked to the health and trajectory of its three core markets. Currently, the company is benefiting from powerful and synchronized tailwinds across defense, aerospace, and digital security, creating a highly favorable operating environment.

Global Defense Spending Supercycle

The global security landscape has fundamentally shifted, triggering a historic increase in military expenditure. According to the Stockholm International Peace Research Institute (SIPRI), world military spending reached $2.718 trillion in 2024, a 9.4% increase in real terms from 2023. This represents the tenth consecutive year of growth and the steepest year-on-year rise since at least the end of the Cold War.⁵ The global military burden—spending as a share of GDP—rose to 2.5%.¹³

This surge is not isolated but is a worldwide phenomenon, with spending increasing across all five geographical regions for the second year in a row.¹² The primary drivers are the war in Ukraine and heightened geopolitical tensions in the Middle East and East Asia.¹⁴

• Europe: This region is the epicenter of the spending boom. European military expenditure rose by 17% to $693 billion in 2024.⁵ NATO members collectively spent $1.5 trillion, accounting for 55% of the global total.¹³ Critically, a growing number of European NATO members are meeting or exceeding the 2% of GDP spending target, with countries like Poland planning to reach 4.7% in 2025.⁶ This trend suggests a sustained, multi-year investment cycle as nations recapitalize their armed forces.
• United States: The U.S. remains the world’s largest spender, with its budget rising 5.7% to $997 billion in 2024, accounting for 37% of the global total.⁵ U.S. spending is focused on modernizing capabilities to maintain a strategic advantage over peer competitors.¹⁴
• Asia-Pacific and Middle East: Tensions in these regions are also driving budget increases. Japan’s spending rose 21%, its largest annual increase since 1952, while Israel’s spending surged 65% in response to the conflict in Gaza.⁵

The nature of this new defense spending cycle is particularly advantageous for Thales. The emphasis has shifted from equipment for counter-insurgency operations to advanced technological capabilities required for high-intensity, peer-level conflict. Modern warfare places a premium on electronic warfare, secure communications, multi-domain command and control, and advanced sensor grids (radars and sonars). These are precisely the areas where Thales possesses deep technological expertise and market leadership. While a nation may purchase a fighter jet from Dassault or a frigate from Naval Group, a substantial and increasing portion of that platform’s value and combat effectiveness is derived from the sophisticated electronics and software systems integrated within it, many of which are supplied by Thales. This positions the company as a key “enabler” of military modernization, allowing it to capture significant value from major platform procurement programs across the globe.

Commercial Aerospace Recovery and Outlook

The commercial aerospace industry has demonstrated remarkable resilience, with air travel demand continuing its strong recovery from the pandemic. The International Air Transport Association (IATA) projects that the total number of travelers will reach a record 4.99 billion in 2025, surpassing pre-pandemic levels.⁷ This robust demand is translating into improved financial health for airlines, with IATA forecasting industry-wide net profits to improve to $36.0 billion in 2025 from $32.4 billion in 2024.⁷

This positive outlook directly benefits Thales’s Avionics business in two ways:

1. New Aircraft Demand: Airlines are expanding and modernizing their fleets to meet growing passenger demand and improve fuel efficiency. This drives demand for Thales’s line-fit avionics systems for new aircraft from manufacturers like Airbus and Boeing. Boeing’s long-term Commercial Market Outlook forecasts that the global fleet will nearly double over the next 20 years.¹⁵
2. Aftermarket Services: The recovery in flight hours increases the need for maintenance, repair, and overhaul (MRO) services for the existing global fleet. Furthermore, airlines are investing in cabin upgrades, particularly for in-flight entertainment and connectivity (IFEC), to enhance the passenger experience and generate ancillary revenue. This aftermarket segment is typically higher-margin and was a key driver of growth for Thales in 2023, with civil aviation aftermarket activities growing by over 30%.¹¹

A potential headwind for the industry is the persistence of supply chain constraints and production challenges at major aircraft manufacturers, which could limit the rate of new aircraft deliveries.¹⁶ However, this could also have a partially offsetting positive effect by forcing airlines to operate existing aircraft for longer, thereby increasing demand for aftermarket services and upgrades.

Structural Growth in Cybersecurity and Digital Identity

Thales’s Digital Identity & Security (DIS) segment is exposed to some of the most powerful secular growth trends in the global economy.

• Cybersecurity Market: The increasing frequency and sophistication of cyberattacks, coupled with the digital transformation of enterprises (cloud migration, remote work), is driving massive investment in security. According to Gartner, end-user spending on information security is projected to surge from $183.7 billion in 2024 to $293.9 billion by 2028, representing a compound annual growth rate (CAGR) of 12.47%.¹⁷ The fastest-growing sub-segment is Cloud Security, with a forecasted CAGR of 25.9%, an area where Thales has significantly strengthened its position with the acquisition of Imperva.¹⁷ Other high-growth areas directly relevant to Thales’s portfolio include Managed Security Services (15.0% CAGR) and Data Security (14.0% CAGR).¹⁷
• Digital Identity Market: The need for secure and verifiable digital identities is exploding across government, finance, and e-commerce. The global digital identity solutions market is forecast to grow at a CAGR of between 16% and 21% through the end of the decade, driven by factors like the rise of online services, regulatory requirements for stronger authentication, and the proliferation of mobile devices.¹⁸ Biometric solutions, a core strength for Thales, represent the largest and fastest-growing segment of this market.¹⁹

These are not cyclical trends but long-term structural shifts. As more of the economy moves online and data becomes the most valuable corporate asset, the demand for the trust and security solutions provided by Thales’s DIS segment is set to continue its strong growth trajectory.

Competitive Positioning

Thales occupies a strong competitive position across its key markets, underpinned by deep technological expertise, long-standing customer relationships, and high barriers to entry. However, the competitive landscape varies significantly by segment, ranging from a concentrated oligopoly in avionics to a highly fragmented cybersecurity market.

Peer Group Comparison

An analysis of Thales’s standing relative to its peers reveals a unique profile as a diversified European technology leader.

• Defence & Aerospace: In the global defense hierarchy, Thales is a top-tier player but is smaller in scale compared to the U.S. defense primes. According to the 2024 Defense News Top 100 list (based on 2023 defense revenues), Thales ranked 17th globally with defense revenues of $10.6 billion.²¹ This places it well behind industry giants like Lockheed Martin ($64.7 billion), RTX ($40.6 billion), and Northrop Grumman ($35.2 billion), as well as its primary European rival, BAE Systems ($27.6 billion).²¹ A key differentiator is Thales’s more balanced portfolio; defense accounted for 53% of its 2023 revenue, compared to 96% for Lockheed Martin and BAE Systems.²¹ This diversification provides greater resilience but can also lead to a valuation discount compared to pure-play defense contractors during an upcycle.
• Avionics: The market for commercial avionics is a global oligopoly dominated by three main players: Collins Aerospace (a division of RTX), Honeywell, and Thales. Market intelligence suggests that Collins and Honeywell hold larger market shares, particularly in North America, benefiting from their strong historical ties with Boeing.²³ Thales’s strength lies in Europe, anchored by its close relationship with Airbus.²³ The company is a top-three global supplier, providing an extensive portfolio of flight control, communication, and navigation systems.²⁴ Competition is intense and focuses on technological innovation, reliability, and long-term support contracts.
• Cybersecurity: The cybersecurity market is highly fragmented and dynamic. Thales competes against a diverse set of companies. In certain areas, its rivals are large, diversified technology firms like Microsoft and Cisco, which leverage their vast enterprise footprint.²⁵ In other areas, it faces pure-play cybersecurity specialists such as Palo Alto Networks and CrowdStrike, which are known for their rapid innovation cycles.²⁶ Thales’s competitive strength is concentrated in specific high-end niches, particularly data security (encryption and key management) and identity and access management (IAM). The acquisition of Imperva was a strategic move to significantly bolster its capabilities in the fast-growing application and data security markets, scaling its presence to compete more effectively with larger pure-play vendors.

Technological Capabilities and R&D

Thales’s most significant competitive moat is its deep-rooted technological prowess. The company’s strategy is predicated on maintaining a leadership position in critical technologies. This is reflected in its commitment to research and development. At its 2024 Capital Markets Day, management outlined a plan to invest approximately €4 billion in R&D over the 2024-2028 period.²⁸ This investment is focused on differentiating technologies that are critical across all its business segments, including:

• Artificial Intelligence (AI): Developing AI for applications ranging from autonomous systems and threat detection to predictive maintenance and air traffic management.
• Cybersecurity: Advancing capabilities in threat intelligence, cloud security, and post-quantum cryptography.
• Connectivity: Innovating in secure, high-bandwidth communications for both military (5G.MIL) and civil (in-flight connectivity) applications.
• Quantum Technologies: Long-term research into quantum sensors and communications, which could provide disruptive capabilities in the future.

This sustained R&D investment is crucial for maintaining the premium positioning of its products and services, which is a core tenet of the company’s strategy.¹

Barriers to Entry and Competitive Moats

Thales’s core businesses are protected by formidable barriers to entry, which insulate it from new competition and support long-term profitability.

• Customer Relationships and Incumbency: In the defense market, relationships with national governments are built over decades and are based on trust, security of supply, and a deep understanding of operational requirements. This incumbency makes it extremely difficult for new entrants to displace established suppliers on major programs.
• Regulatory and Certification Hurdles: Both the aerospace and defense industries are subject to exceptionally stringent safety, security, and performance standards. The process of certifying new avionics equipment or qualifying new military systems can take years and cost hundreds of millions of dollars, a significant deterrent to potential competitors.
• High R&D and Capital Intensity: The scale of investment required to develop next-generation radar systems, satellites, or flight control computers is immense, creating a high capital barrier.
• Large Installed Base: Thales benefits from a vast installed base of equipment on thousands of aircraft and naval vessels worldwide. This base generates a long tail of high-margin, recurring revenue from aftermarket services, support, and upgrades, providing a stable and profitable foundation for the business.
• Strategic Partnerships: Thales has a proven ability to form and manage complex industrial partnerships and joint ventures, such as Thales Alenia Space with Leonardo and Eurosam with MBDA.¹⁰ This collaborative approach is essential for bidding on and executing large-scale European defense programs, which are often too large and complex for a single company to handle alone.

Financial Performance & Growth Analysis

Thales has delivered a period of strong and accelerating financial performance, characterized by robust top-line growth, consistent margin expansion, and exceptional cash flow generation. An analysis of its financial statements from 2018 through 2024 reveals a company that successfully navigated the COVID-19 downturn and is now capitalizing on favorable market conditions.

Revenue and Order Growth Trends

Thales’s sales have grown from €15.9 billion in 2018 to €20.6 billion in 2024, demonstrating a solid growth trajectory despite the significant disruption to its civil aerospace business during the pandemic.⁴ The recent acceleration is particularly noteworthy. In 2023, the company delivered organic sales growth of 7.9%, followed by an even stronger 8.3% in 2024, with both years exceeding initial guidance.³ This growth has been broad-based, driven by double-digit expansion in the Defence & Security segment and a strong recovery in civil aeronautics.³

The most compelling indicator of future growth is the company’s order book dynamic. Thales has achieved a book-to-bill ratio (the ratio of orders received to revenue recognized) significantly above 1.0 for four consecutive years: 1.34 in 2022, 1.26 in 2023, and 1.23 in 2024.⁴ This sustained momentum, where orders are consistently outpacing sales, has led to a record-breaking order backlog. The consolidated order book swelled from €32.3 billion at the end of 2018 to €50.6 billion at the end of 2024, providing an unprecedented level of revenue visibility for the coming years.⁴

Profitability and Margin Expansion

Thales has demonstrated a consistent ability to improve its profitability. The adjusted EBIT margin has expanded steadily, rising from 10.6% in 2018 to 11.0% in 2022, 11.6% in 2023, and reaching a new high of 11.8% in 2024.⁴ This margin enhancement reflects strong operational leverage, where profits grow faster than sales, as well as disciplined cost control and a favorable business mix shifting towards higher-margin activities. Adjusted net income has followed a similar upward trend, growing 7% in 2024 to reach €1.9 billion.⁴

Cash Flow Generation and Working Capital Management

The standout feature of Thales’s financial performance is its exceptional ability to generate cash. The company has produced free operating cash flow (FOCF) in excess of €2 billion for three consecutive years (2022-2024).³

The key metric highlighting this strength is the cash conversion ratio, which measures the proportion of adjusted net income that is converted into free operating cash flow. Thales has maintained this ratio above 100% for five straight years, reaching 115% in 2023 and 114% in 2024.³ This performance is significantly above the industry average and is a result of several factors:

• Favorable Contract Terms: Large, long-term defense contracts often include significant advance and milestone payments from customers, which positively impacts working capital.
• Disciplined Program Management: Effective execution of projects prevents cost overruns and delays that can tie up cash.
• Active Working Capital Initiatives: Management has implemented a group-wide program (“CA$H!”) focused on optimizing inventory, receivables, and payables.³

This strong and predictable cash flow provides the company with significant financial flexibility to fund its strategic priorities, including R&D investment, acquisitions, and shareholder returns.

Capital Structure and Financial Flexibility

As of December 31, 2024, Thales reported a net debt position of €3.0 billion.⁴ This level of indebtedness appears conservative and manageable, particularly when viewed in the context of the company’s strong and consistent cash flow generation. The robust financial position gives Thales the capacity to pursue its strategic agenda, including further bolt-on acquisitions, without unduly stressing its balance sheet.

The following table provides a summary of Thales’s key financial metrics over the past seven years, illustrating the trends discussed above.

Metric	2018	2019	2020	2021	2022	2023	2024
Order Intake (€M)	16,034 29	19,142 31	18,476 32	19,909 33	23,551 30	23,132 11	25,289 4
Sales (€M)	15,855 29	18,401 31	16,989 32	16,192 33	17,569 30	18,428 11	20,577 4
Book-to-Bill Ratio	1.01	1.04	1.09	1.23	1.34	1.26	1.23
Adjusted EBIT (€M)	1,685 29	2,008 31	1,352 34	1,649 33	1,935 30	2,132 11	2,419 4
Adjusted EBIT Margin (%)	10.6%	10.9%	8.0%	10.2%	11.0%	11.6%	11.8%
Adjusted Net Income (€M)	1,178 29	1,405 31	937 32	1,361 33	1,556 30	1,768 11	1,900 4
Free Operating Cash Flow (€M)	811 29	1,372 35	1,057 34	2,515 33	2,527 30	2,026 11	2,027 3
FOCF Conversion Ratio (%)	69%	98%	113%	185%	162%	115%	114%

Note: Financial data is sourced from the company’s full-year results press releases for the respective years. Ratios are calculated based on this data.

Growth Opportunities & Strategic Initiatives

Thales has articulated a clear and ambitious strategic roadmap for the period 2024-2028, which was detailed at its Capital Markets Day in November 2024.¹ The strategy is focused on leveraging its strengthened portfolio to deliver accelerated, profitable, and sustainable growth.

Medium-Term Financial Targets (2024-2028)

Management has set the following key financial objectives for the five-year period, using 2023 as the base year ¹:

• Organic Sales Growth: A compound annual growth rate (CAGR) of +5% to +7%. This target represents an acceleration from the historical growth rate and is predicated on broad-based expansion across its core businesses.
• Adjusted EBIT Margin: An improvement to a range of 13% to 14% by 2028. This implies a significant margin expansion of 140 to 240 basis points from the 11.6% achieved in 2023.
• Free Operating Cash Flow Conversion: An average conversion ratio of 95% to 105% of adjusted net income over the period, maintaining the company’s strong track record of cash generation.

Achieving these targets would result in a 50-60% growth in adjusted EPS over the five-year period.¹

Segment-Specific Growth Strategies and Ambitions

The group-level targets are underpinned by specific roadmaps for each business segment ¹:

• Defence & Security: The strategy is to leverage its extended production capabilities to capture the high growth in global defense markets. The target is for a sales CAGR of +6% to +7% while maintaining a best-in-class EBIT margin of 13% by 2028.
• Avionics: The plan is to capitalize on a state-of-the-art product portfolio to meet strong demand from both new aircraft production and the aftermarket. The target is for a sales CAGR of +5% to +7% and an EBIT margin of 13% to 14% by 2028.
• Space: The primary focus is on restoring profitability. The strategy involves adapting the business to new market conditions in the telecommunications sector and being selective about business opportunities. The target is for a modest sales CAGR of +2% but a significant recovery in the EBIT margin to 7% or more by 2028.
• Cyber & Digital: The objective is to leverage its unique and expanded product offering, including the newly acquired Imperva, to reinforce its leadership position in this fast-growing market. The target is for a sales CAGR of +6% to +7% and a sector-leading EBIT margin of 16% to 17% by 2028.

A significant portion of the group’s overall margin expansion target is dependent on the successful execution of the turnarounds and improvements in the Aerospace segment. The recovery of the Space margin to over 7% is mathematically critical for achieving the group’s 13-14% target. Furthermore, reaching a 13-14% margin in the highly competitive Avionics business will demand flawless program execution, sustained pricing power, and continued strength in the high-margin aftermarket business. Any significant deviation from these segment-level margin goals could place the group’s overall profitability ambitions at risk.

Acquisition Strategy and Integration

Thales’s acquisition strategy is focused on targeted, bolt-on acquisitions that enhance its technological capabilities and market positions in its core segments. The recent acquisitions of U.S.-based application security firm Imperva and Cobham AeroComms are prime examples of this strategy in action.¹ These deals strengthen the company’s presence in the high-growth cybersecurity market and expand its avionics portfolio, respectively. A key strategic priority for management is the successful integration of these businesses to deliver the expected revenue and cost synergies, which are factored into the medium-term financial targets.¹

Investment in Innovation and Emerging Technologies

To reinforce its premium positioning and maintain its technological edge, Thales plans to significantly increase its investment in innovation. Management has committed to investing approximately €4 billion in R&D between 2024 and 2028.²⁸ This investment will be directed towards differentiating, disruptive technologies such as artificial intelligence, quantum computing, secure cloud, and advanced connectivity solutions.¹ This commitment underscores the company’s belief that technological leadership is its primary competitive advantage and the key to long-term value creation.

Capital Allocation & Shareholder Returns

Thales employs a disciplined and conservative capital allocation framework that prioritizes reinvestment for long-term growth while providing consistent returns to shareholders. The company’s exceptional cash flow generation provides the foundation for this balanced approach.

Research & Development (R&D)

Investment in R&D is the top capital allocation priority, viewed as essential for maintaining the company’s technological leadership and competitive moat. As outlined in its 2024-2028 strategic plan, Thales intends to invest approximately €4 billion in R&D over the five-year period, which translates to roughly €800 million annually.²⁸ This represents a significant commitment to funding innovation in strategic areas like AI and quantum technologies, which are seen as crucial for future growth across all business segments.

Dividend Policy and Sustainability

Thales has a clear and consistent dividend policy, targeting a payout ratio of 40% of its adjusted net income, Group share, per share.³ This policy has resulted in a steadily increasing dividend, reflecting the company’s growing earnings.

• For fiscal year 2022, the dividend was €2.94 per share.³⁰
• For fiscal year 2023, it was increased by 16% to €3.40 per share.¹¹
• For fiscal year 2024, a further increase to €3.70 per share has been proposed.³

Historical dividend data shows a strong track record of growth over the past decade, with the exception of a reduction in 2019-2020 during the height of the COVID-19 uncertainty.³⁸ The 40% payout ratio is sustainable and allows the company to retain significant capital for reinvestment.

Share Buyback Programs

Unlike many of its peers, particularly in the U.S., Thales does not use share buybacks as a primary tool for returning capital to shareholders. Instead, the company’s share repurchase programs are primarily functional, designed to acquire existing treasury shares that are then used to service its employee share ownership plans.⁴⁰ These plans, which are offered to employees in 36 countries, are intended to align employee interests with those of shareholders by allowing them to acquire shares at a discount.⁴¹ This approach means that buybacks typically offset the dilution from these plans rather than actively reducing the total number of shares outstanding. This conservative stance prioritizes strategic reinvestment in the business—through R&D, CapEx, and M&A—over financial engineering to boost earnings per share.

Capital Expenditures (CapEx)

Capital expenditures are primarily directed towards enhancing and expanding production capacity to meet the demands of the record order backlog. With the significant increase in orders, particularly in the Defence & Security segment, investments are being made to ramp up production lines for key programs, such as radars and missile systems, to ensure timely delivery to customers.³

Recent Developments & Challenges (2022-2024)

The period from 2022 to 2024 has been transformative for Thales, marked by significant strategic actions, strong commercial momentum, and the navigation of a complex macroeconomic environment.

Supply Chain Disruptions and Inflationary Pressures

In line with the broader industrial sector, Thales has contended with supply chain disruptions and component shortages. These challenges have been most acutely felt in the Space segment, where they were cited as a reason for delays in the execution of several contracts in 2023.¹¹ While pressures have been easing, the company noted the need to remain vigilant regarding their potential impact on production.⁴³ The inflationary environment has also presented a challenge, increasing input costs for materials and labor. The company’s ability to pass these costs on to customers through pricing clauses in its contracts and to drive internal efficiencies has been crucial for protecting and expanding its profit margins.

Major Contract Wins and Backlog Growth

This period has been characterized by outstanding commercial success, which has fueled the growth of the order book to record levels. The company has secured a steady stream of large contracts (defined as having a unit value over €100 million).

• In 2022, Thales booked 29 large orders, including a jumbo contract related to the supply of 80 Rafale aircraft to the United Arab Emirates.³⁰
• In 2023, 25 large orders were signed, including satellites for the Italian IRIDE constellation and a contract for the mid-life upgrade of French and Italian Horizon-class frigates.¹¹
• In 2024, the momentum continued with 35 large orders, including contracts for the third tranche of Rafale aircraft for Indonesia, sonars for French nuclear submarines, and air defense missiles for France and Italy.³

These consistent, high-value wins underscore the strong demand for Thales’s technologies and are the primary driver behind the €50.6 billion backlog at the end of 2024.⁴

Strategic Portfolio Reshaping

A defining feature of this period has been a deliberate and significant reshaping of the company’s portfolio.

• Divestment of Ground Transportation Systems: Thales entered into exclusive negotiations with Hitachi Rail to divest its Ground Transportation Systems business.¹¹ This move represents a strategic exit from a lower-margin, more capital-intensive business to sharpen the company’s focus on its core aerospace, defense, and digital technology markets.
• Acquisitions of Imperva and Cobham AeroComms: In a clear pivot towards higher-growth areas, Thales completed the acquisitions of Imperva, a leader in application and data security, and Cobham AeroComms, which specializes in cockpit communications systems.¹ These transactions significantly scale the company’s presence in cybersecurity and strengthen its avionics portfolio, aligning the business with long-term secular growth trends.

Balance Sheet De-risking

In 2023, Thales took a significant step to de-risk its balance sheet by transferring the obligations of its Thales UK Pension Scheme to a third-party insurer, Rothesay.¹¹ While this resulted in a substantial one-time, non-recurring expense of £349 million, it removed a large and volatile long-term liability from the company’s books, improving the quality and predictability of its financial position.¹¹

Risk Factors

Despite its strong market position and positive outlook, Thales is exposed to a range of risks inherent to the aerospace, defense, and technology industries. These factors could materially impact the company’s ability to achieve its strategic and financial objectives.

Government Budget and Defense Priorities

A significant portion of Thales’s revenue, particularly in the Defence & Security segment, is dependent on the national budgets of a relatively small number of key government customers, including France, the United Kingdom, and Australia. While defense spending is currently in a strong upcycle, these budgets are subject to political and economic pressures. A future shift in government priorities away from defense, or a period of significant fiscal consolidation, could lead to program delays, cancellations, or reduced spending, which would directly and adversely affect Thales’s revenue and order intake.

Program Execution and Contractual Risks

Thales is engaged in large-scale, technologically complex, and long-duration development and production contracts. These programs carry inherent execution risks, including the potential for unforeseen technical challenges, supply chain disruptions, cost overruns, and schedule delays. Failure to meet contractual performance milestones on a major program could result in financial penalties, reputational damage, and a negative impact on profitability. The Space business, in particular, has recently highlighted the impact of execution delays on its financial performance.¹¹

Geopolitical and Export Control Risks

Operating as a global defense contractor exposes Thales to significant geopolitical risks. Changes in international relations, the imposition of sanctions, or shifts in alliances can impact the company’s ability to access certain markets or collaborate with international partners. Furthermore, the export of defense and dual-use technologies is subject to stringent and evolving government regulations and controls. The denial of an export license for a major contract could result in a significant loss of business.

Technology Obsolescence and Innovation Risks

Thales’s competitive advantage is built on its technological leadership. The markets in which it operates are characterized by rapid technological change. The company must continually invest in R&D to keep pace with advancements in areas like AI, cybersecurity, and quantum technologies. Failure to innovate effectively or a misjudgment of future technological trends could lead to product obsolescence and an erosion of its competitive position relative to more agile or focused competitors.

Currency Exposure

As a company with global operations and sales denominated in various currencies, but with a cost base heavily concentrated in the Eurozone, Thales is exposed to fluctuations in foreign exchange rates. A significant appreciation of the euro against key currencies like the U.S. dollar can have a negative translation effect on reported revenues and profits, and it can also impact the price competitiveness of its products in international markets. The company engages in hedging strategies to mitigate this risk, but it cannot be eliminated entirely.

Customer and Program Concentration

While Thales has a diversified portfolio, its results can be influenced by a concentration of business with key customers (e.g., the French DGA, Airbus) and on a few very large programs (e.g., the Rafale fighter jet). Any significant disruption in the relationship with a major customer or a major issue with a flagship program could have a disproportionate impact on the company’s financial results and market perception.

Valuation Analysis

An analysis of Thales’s valuation indicates that the market has priced the company at a significant premium relative to its historical levels and its industry peers. This premium appears to reflect the company’s strong recent performance, exceptional revenue visibility, and strategic positioning in high-growth markets. The key question for investors is whether this premium is justified by the company’s fundamental outlook.

Valuation Multiples vs. Historical Ranges

A review of Thales’s historical valuation multiples would be necessary to determine its current standing relative to its own past. Given the significant strategic transformation (divestment of transport, acquisition of Imperva) and the dramatic shift in the defense market outlook, historical comparisons may be less relevant than they are for more stable companies. The current market environment is fundamentally different from that of the past five years.

Peer Group Benchmarking

Comparing Thales’s valuation multiples to those of its direct competitors provides critical context. The peer group includes other major European and U.S. aerospace and defense contractors.

Metric	Thales SA (HO.PA)	RTX Corp (RTX)	BAE Systems (BAESY)	Lockheed Martin (LMT)	Industry Average
Market Cap	€46.4B 44	$120.2B	£43.5B	$111.9B	–
Enterprise Value (EV)	€49.7B 45	$175.7B	£47.6B	$126.8B	–
LTM P/E Ratio	45.5x 46	42.1x	21.0x	16.5x	31.3x
Forward P/E Ratio	20.6x 47	18.5x	16.8x	16.2x	18.0x
LTM EV/Sales	2.4x 45	2.4x	2.1x	1.9x	2.2x
LTM EV/EBITDA	14.8x 45	16.1x	12.3x	13.5x	14.2x

Note: Data as of late 2024/early 2025 from various sources. Peer data is for their respective U.S. and U.K. listings. Market caps and EVs are approximate and fluctuate. P/E and EV/EBITDA ratios can vary based on calculation methodology (e.g., GAAP vs. adjusted earnings). This table is for illustrative benchmarking purposes.

The data indicates that on a trailing twelve-month (LTM) Price-to-Earnings (P/E) basis, Thales appears significantly more expensive than its peers, trading at over 45x earnings compared to an average closer to 30x.⁴⁴ However, this trailing multiple is distorted by non-recurring items. A more forward-looking view shows the valuation to be more in line with, though still at a premium to, the peer group. The forward P/E ratio of approximately 20.6x is higher than the average of its peers.⁴⁷ On an Enterprise Value to Sales and Enterprise Value to EBITDA basis, Thales trades at a slight premium to the industry average.

Justification for Valuation Premium

Several fundamental factors could be argued to justify Thales’s premium valuation:

• Superior Growth Profile: Thales’s management has guided for a 5-7% organic sales CAGR through 2028, which is at the higher end of the range for a large-cap defense contractor. The significant exposure to the high-growth cybersecurity market via the DIS segment provides a growth kicker that most peers lack.
• Unmatched Revenue Visibility: The record order backlog of nearly €51 billion, equivalent to approximately 2.5 years of sales, provides a level of revenue predictability that is rare and highly valued by the market, especially in an uncertain economic environment.
• Exceptional Cash Generation: The company’s demonstrated ability to consistently convert over 100% of its net income into free cash flow is a mark of high financial quality and deserves a premium valuation.
• Strategic Positioning: The company is perfectly positioned to benefit from the “trinity” of tailwinds in defense modernization, aerospace recovery, and digitalization.

Sum-of-the-Parts (SOTP) Consideration

Given the diverse nature of Thales’s business segments, a sum-of-the-parts valuation perspective is useful. The DIS segment, with its software-centric business model and exposure to the high-growth cybersecurity market, would likely command a significantly higher valuation multiple (akin to pure-play cybersecurity firms) if it were a standalone company. The Defence & Security and Aerospace segments would be valued more in line with their respective industry peers. The consolidated valuation of Thales is a blend of these different components. The increasing weight of the high-multiple DIS segment in the overall business mix could be a driver of further value creation over the long term.

Key Metrics to Monitor

To assess Thales’s ongoing performance and its progress toward its strategic objectives, investors should closely monitor the following key operational and financial metrics:

• Book-to-Bill Ratios: This is the primary leading indicator of future revenue growth. A sustained ratio above 1.0 across the group, and particularly in the Defence & Security segment, is essential to confirm that demand remains robust and the backlog continues to grow.
• Order Backlog Quality and Duration: Beyond the headline backlog number, investors should monitor the composition and duration of the order book. An increasing proportion of long-term, high-margin service and support contracts would enhance the quality and predictability of future earnings.
• Margin Expansion/Contraction Drivers: Close tracking of adjusted EBIT margins by segment is critical. Specifically, investors should look for evidence of the planned profitability recovery in the Space business and continued margin expansion in the Digital Identity & Security segment, as these are key pillars of the 2028 group margin target.
• Free Cash Flow Conversion Rates: Continued performance within or above the company’s target range of 95-105% is crucial to the investment case. Any significant or sustained drop below this level could signal issues with working capital management or program execution.
• R&D Efficiency and Innovation Pipeline: While R&D spending is a key input, the output is what matters. Investors should monitor for major new product launches, significant contract wins based on new technologies, and growth in the company’s patent portfolio as indicators of R&D effectiveness.
• International Revenue Diversification: Tracking the geographic mix of both order intake and sales is important. Continued strong growth in emerging markets, particularly in the Middle East and Asia, would validate the company’s international expansion strategy and provide diversification away from its traditional European home markets.

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