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Thales Group (OTCPK:THLEF)(OTC:THLEY) is a high tech conglomerate from France with a focus on aerospace and defense industry. This article will have a look at the company and uses Thales to view the web of connections in the European aerospace and defense industry. As a bonus a surprising peer review with General Dynamics (NYSE:GD).

FUNDAMENTALS1

Thales20122011201020092008
Revenue$19,538$17,979$18,112$17,776$17,477
Net income$740$706-$148-$278$773
EBIT$1,126$936-$239$71$1,038
EBIT%5.76%5.21%-1.32%0.40%5.94%
FCF$804$432$286$1,016$395
EPS$3.71$3.59-$0.76-$1.42$3.93
Dividend$1.21$1.08$0.69$0.69$1.45
Dividend Yield1.85%
PE (Price/Earnings)17.70

Thales is a high tech company with a broad spectrum of activities. In 2007 the Nobel Prize in Physics was given to the scientific director of a joint Thales - CNRS research unit. This indicates both the quality of R&D and the close relation between Thales and the French government.

Thales is increasingly less dependent on the French government. Commercial revenue is increasing over the years and the balance between commercial - defense is 45% to 55% now.

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Thales Group is a conglomerate with 5 divisions. Financial reporting is done in 2 segments: defense related in Defence3 & Security and Aerospace & Transport [commercial].

Aerospace & Transport:

Aerospace provides electronic on-board equipment and ground-based systems for navigation, air-traffic control, and simulation. This is done to all major manufacturers such as Boeing (NYSE:BA), Airbus (OTCPK:EADSF)(OTCPK:EADSY), Bombardier (OTC:BOMBF)(OTCPK:BDRAF) and General Dynamics.

Space designs payloads for missions as well as networking satellite solutions and satellite delivery services. On the ground hosting services for satellites are offered.

Transportation offers systems, solutions, equipment and services for mobility on railways, roads and public networks.

Aerospace & Transport20122011201020092008
Revenue$8,340$7,927$7,728$7,452$5,822
EBIT$541$394-$305-$145$285
EBIT%6.49%4.97%-3.94%-1.94%4.89%

The negative results in 2009 and 2010 were caused by extra costs on the Airbus A400M military transport contract and extra expenses to meet customers milestones.

Delays at Bombardier and Boeing's Dreamliner also contributed to the losses.

Defence & Security:

Defence designs and delivers systems for all four environments: air, land, sea and space.

Security provides services and systems to protect states, cities, critical infrastructure and cyberspace against a spectrum of risks.

Defence & Security20122011201020092008
Revenue$10,336$10,369$10,787$10,709$12,265
EBIT$696$688$212$454$961
EBIT%6.73%6.64%1.96%4.24%7.84%

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THE GORDIAN KNOT

Thales is a good example of how complex connections can be in European companies; especially those with a state-owned background. It also determines how (financial) results and news should be interpreted.

European companies in the aerospace and defense industries have a long and successful history of cooperation, joint ventures, participations or whatever name its given with other organizations.

These do not have to run along political boundaries or temporary alliances, but often cross political systems and continents, often lasting many decades.

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Dassault Aviation (OTC:DUAVF), which is described in Purveyor Of France owns 26% of Thales. But Dassault Aviation itself is 97% owned by Airbus Group and GIMD. The results of Thales (of the 26%) are consolidated in the results of Dassault Aviation.

Thales itself has a 35% share in DCNS, which is a public limited company (Société Anonyme), but 65% owned by the French government. DCNS is a strategic industry and builds submarines and surface ships for the French navy and foreign clients.

DCNS is comparable with the Marine Systems division of General Dynamics. The chart below compares revenue and EBIT% of DCNS and General Dynamics. In essence DCNS is the 'virtual' marine systems division of Thales.

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DCNS has a Brazilian subsidiary which also works for the Brazilian Navy. The Brazilian Navy uses a single (former French) aircraft carrier and plans to replace this in the next decade with a new aircraft carrier. This will most likely be built by DCNS; probably in a JV with a Brazilian company.

The 35% results of DCNS are consolidated in the results of Thales (and through Thales also in the results of Dassault Aviation)

Thales has 5 divisions (reported in 2 financial segments) as core business. Thales Alenia Space is 1/3 owned by Italian Finmeccanica (OTCPK:FINMY)(OTCPK:FINMF), which is described in Empire Building At A Price.

INVESTING

Thales is a well run company with:

  • Growing revenue;
  • Growing profitability;
  • Good dividend which is likely to grow;
  • Dependence on government orders is decreasing;
  • Implicit government support because parts of Thales are strategic industries;
  • Not expensive for a high tech company with a PE of 18.

This information is intended to inform the reader. The information does not constitute investment advice or an offer to invest.

Footnotes

1. Financial data sources are from annual and other reports published by Thales Group.

  • Stock price used: USD 65.72 / EUR 47.62
  • Exchange rate EUR/USD 1.38

2. All charts are created by Confero.

3. The spelling used by Thales is also used in the article.

Source: Thales: Sampling The Gordian Knot Of European Aerospace And Defense Industry