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.

Contrarian angles: The market is already pricing multi‑year secular defense growth (many names +50–100% YTD); this may be overdone if backlog execution lags. Look for idiosyncratic shorts among commercial aviation suppliers with high cyclicality and weak orderbooks (e.g., narrow‑margined Tier‑2s) and pair against defensive primes. Historical parallels (post‑Korean War/Cold War spikes) show 12–24 month mean reversion once budgets normalize — set profit‑taking at +30–40% and use 15% stops on longs.

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.