Thales Earnings: Cash Outperformance and Defense Backlog Anchor 2028 Margin Path

Key Morningstar Metrics for Thales

• Fair Value Estimate
  : €308
• Morningstar Rating
  : ★★★★
• Morningstar Economic Moat Rating
  : Wide
• Morningstar Uncertainty Rating
  : Medium

What We Thought of Thales’ Earnings

Thales HO reported 2025 sales of €22.1 billion, up 8.8%, with adjusted EBIT of €2.74 billion and a 12.4% margin. Free operating cash flow reached €2.58 billion, implying 128% cash conversion.

Why it matters: Thales beat estimates across the board. Revenue was well above upgraded guidance, and EBIT margin expanded despite rising investment, as delivery volume in defense and avionics absorbed fixed costs. Free operating cash flow was the real standout, converting at 128% of net income, far above the 95%-100% target.

• Defense backlog now extends to 3.4 years. Twenty large contracts were secured, led by air defense programs and major awards from the UK and German ministries. Ukraine revenue more than doubled but remains only around 3.5% of defense sales.
• Avionics grew by double digits on aftermarket strength and production ramps, while space delivered positive EBIT versus a breakeven target. Cyber and digital was flat as the Imperva integration weighed, though cyber products returned to growth in the fourth quarter, which we see as an inflection.

The bottom line: We maintain our €308 fair value estimate, supported by Thales’ portfolio breadth across fast-growing areas where NATO has some of the highest capability gaps, including radars, electronic warfare, optronics, communications, and air defense.

• European defense spending is projected to grow by high single digits annually through 2035. Thales is the leading European defense electronics provider and a key missile partner. In avionics, IATA forecasts passenger numbers to double over 20 years, underpinning continued demand for flight systems and aftermarket.
• Space returning to positive EBIT removes a prior margin drag, with a path to 7% by 2028, supported by IRIS² and the Bromo joint venture with Airbus and Leonardo targeting 2027 operations. Cyber remains weak after the Imperva acquisition, but the fourth quarter marked a return to growth, with supportive underlying demand.