Thales, the French aerospace and defense giant, is a company built on precision. Their radars can track objects hundreds of miles away, their avionics guide aircraft through crowded skies, and their cybersecurity systems protect sensitive data with meticulous care. Yet, when it comes to their own future, Thales seems to be playing coy, cloaking their true potential behind a veil of modest growth projections.

Digging into their recent Q1 2024 earnings transcript (see below), a peculiar trend emerges - one that suggests their "mid-single digit growth" mantra might be a strategic smokescreen, masking an explosive growth trajectory that could leave analysts scrambling to revise their forecasts.

The first clue lies in the stark contrast between Thales' defense order intake and their revenue guidance. In 2023, their defense book-to-bill ratio hovered between a staggering 1.4 and 1.5, indicating that orders significantly outpaced revenue. This trend continued into Q1 2024, with a record high defense backlog of €36 billion, representing an astonishing 3.7 years of sales. This alone suggests a pent-up demand far exceeding their projected mid-single digit growth.

But the transcript reveals a more nuanced story. While acknowledging the robust order book, Thales CFO, Pascal Bouchiat, emphasizes the challenges of converting this demand into revenue, citing supply chain constraints as the primary bottleneck. He highlights two specific areas of concern: PCBs and mechanical parts. Thales, bound by domestic sourcing requirements for defense contracts, is limited in their ability to find alternative suppliers.

This is where the intrigue deepens. Bouchiat, while painting a picture of caution, reveals a game-changing initiative - a massive investment to more than double their radar production capacity by 2025. This seemingly innocuous detail holds the key to unlocking Thales' true growth potential.

Let's delve into the numbers. Assuming a conservative 5% annual organic growth for Thales' defense business, their revenue in 2025 would be approximately €10.8 billion. Now, consider the impact of doubling their radar production capacity. If radars currently contribute, for example, 20% of their defense revenue, or around €2 billion, doubling capacity implies a potential revenue boost of €2 billion by 2025.

This, however, is just the tip of the iceberg. Thales isn't merely increasing their output; they're positioning themselves at the forefront of technological innovation. Their Ground Master radar, described as a "star product," is attracting significant interest globally, further fueling their growth potential.

The implications extend far beyond radars. Bouchiat hints at similar capacity expansion efforts across their defense portfolio, encompassing electronic combat systems, communication systems, and surface radars. Each of these areas presents a unique opportunity for exponential growth, fueled by a global surge in defense spending.

Thales' calculated silence on their full growth potential raises intriguing questions. Are they intentionally downplaying expectations to avoid scrutiny from regulators and competitors? Or are they simply being cautious, recognizing the inherent volatility of the defense market?

Regardless of the rationale, the evidence suggests a powerful undercurrent of growth brewing within Thales. Their massive backlog, coupled with strategic capacity expansions and a relentless focus on innovation, paints a picture of a company poised for a dramatic surge in revenue.

While "mid-single digit growth" may sound reassuringly familiar, it fails to capture the full scope of Thales' ambitions. Their secret weapon lies in their ability to convert their technological prowess and burgeoning order book into tangible financial gains. And when the dust settles, it's likely that Thales' "mid-single digit" projections will be remembered as a colossal understatement, marking the beginning of a new era of dominance for the French defense giant.

Defense Backlog Growth

The following chart illustrates the rapid growth of Thales' defense backlog, indicating strong future revenue potential.

Q1 2024 Earnings Transcript - Please refer to the latest earnings transcript on the Thales Group Investor Relations website.

"Fun Fact: Did you know Thales is also a leading player in the transportation market, providing signaling and communication systems for railways and urban mobility solutions? They're even involved in the development of driverless metro systems! This further highlights their diverse capabilities and potential for growth beyond the aerospace and defense sectors."