France’s Thales ‘extensively’ ramps up production to meet a global boom in defense spending, says international CEO Pascale Sourisse

Thales is benefiting from a global surge in defense spending—SIPRI estimates $2.7 trillion in arms spending in 2024—prompting the company to ramp production (radar output quadrupled) and expand capacity in Asia and India. For the first nine months of 2025 Thales reported €15.3 billion in revenue, up 8.4% year-on-year, with the defense segment generating €8.2 billion (just over half of total) and growing 14% YoY; shares have risen over 50% in the past 12 months. The company is also investing in AI-enabled avionics and air-traffic systems (citing ~10% potential fuel savings) and scaling its cybersecurity and secure-credentials manufacturing after the Gemalto acquisition, reinforcing both its commercial and defense revenue streams.

Analysis

Market structure: The immediate winners are large defense primes and systems integrators with radar, C‑UAS, avionics and cyber franchises — e.g., Thales (HO.PA), Rheinmetall (RHM.DE), Hanwha Aerospace (012450.KS), Mitsubishi Heavy (7011.T) and ST Engineering (S63.SI) — plus component suppliers (RF semis, optronics, beamforming). Pricing power will shift to specialists (sensors, C‑UAS, cyber) as governments pay premiums for urgent capacity; expect orderbacklog growth of 15–30% in exposed names over 12–24 months and margin expansion if supply chains are managed. Commodities (steel, aluminum, copper), specialized chips and battery metals will see demand pull; higher defense capex and fiscal deficits bias real yields up 20–50bp over 12–18 months and lift EUR/GBP vs emerging FX tied to reduced social spending.

Risk assessment: Tail risks include rapid geopolitical de‑escalation (-40–60% downside to sector sentiment), export controls fragmenting supply chains (raising production costs 5–15%), or a major cyber breach at a prime that triggers contract cancellations. Immediate (days) risk is sentiment correction after recent run‑ups; short term (weeks/months) is execution/backlog proof in earnings; long term (quarters/years) is political funding cycles and export regulation. Hidden dependencies: defense revenue is lumpy and tied to single large orders and FX; monitor backlog conversion rates and government budget schedules as catalysts.

Trade implications: Establish selective long exposure to Thales (HO.PA) and Rheinmetall (RHM.DE) using capital‑efficient option structures: buy 12‑month call spreads (e.g., 0.5–1% notional each) to target +25–40% while capping premium; overweight US/European defense via XAR/ITA (3–5% portfolio) for diversified access. Reduce duration of IG bonds to <4 years and increase TIPS/T‑bills by 5–10% to hedge fiscal/inflation risk. Buy commodity exposure: 1–2% in a steel ETF (SLX) or REMX (rare earths) to capture input price upside.

Key Decisions for Investors

• Establish a 2.5% portfolio long in Thales (HO.PA) via a 12‑month 20% OTM call spread (buy calls, sell higher strike) targeting +30% upside; set a hard stop-loss at -15% of notional if share price falls below a 10% pullback from entry within 3 months.
• Add a 1.5% position in Rheinmetall (RHM.DE) using 9–12 month calls (or call spread) to capture expected backlog conversion; trim if orderbook growth <10% y/y on next quarterly release.
• Allocate 3–5% to defense ETFs (XAR or ITA) over 3 months to gain diversified exposure; reduce cyclicals by 3% (consumer discr./leisure) to fund this rotation and reassess after Q2 budget announcements from NATO/EU.
• Reduce duration in core bond holdings to <4 years and increase cash/T‑bills/TIPS by 5–10% within 30 days to hedge potential 20–50bp rise in yields from sustained defense fiscal spending.
• Initiate a pair trade: Long ST Engineering (S63.SI) 1.5% and short a narrow‑margin aerospace Tier‑2 (select regional supplier with >40% revenue exposure to commercial aviation) 1.5%; unwind if the long underperforms the short by >10% over 6 months.