Employee recruitment is hitting record levels in one industry...

And no, it's not AI.

Defense companies across the U.S. and Europe plan to hire more than 37,000 people this year. This will account for nearly 10% of the existing workforce.

The reason is simple... Overseas tensions like Russia's invasion of Ukraine and strained China-Taiwan relations are creating a lot of geopolitical uncertainty. Countries are spending more on their militaries.

Someone has to design, develop, and test all that cutting-edge weaponry. That's why defense companies are desperate to hire more employees.

Most folks think of the U.S. when looking at defense stocks... and for good reason. We boasted four of 2023's top five defense companies by revenue (and six of the top 10).

However, one of this year's biggest hirers is from a NATO member country outside of the U.S...

Thales (HO.PA) is one of the largest defense companies in France...

It provides advanced technology solutions and services in avionics, cybersecurity, satellite communications, and air traffic management.

Thales operates in 68 countries worldwide. It supplies the European Command, Control, Communications, Computers, Intelligence, Surveillance, Target Acquisition, and Reconnaissance ("C4ISTAR") initiatives.

(Think of C4ISTAR as the central nervous system that connects NATO's various military operations.)

Thanks to the big contracts it has been getting in these specialized areas, the company's order books have expanded substantially. That's why Thales is planning to hire more than 8,000 personnel this year, growing its workforce by more than 10%.

Considering it has recruited nearly 9,000 employees in the past three years combined, this is a big deal. And investors have a pretty good idea of Thales' potential. We can see this through our Embedded Expectations Analysis ("EEA") framework.

The EEA starts by looking at a company's current stock price. From there, we can calculate what the market expects from future cash flows. We then compare that with our own cash-flow projections.

In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.

Thales averaged around a 15% Uniform return on assets ("ROA") before 2023... a little above the 12% market average. That number shifted way higher last year, hitting 28%.

The market is pricing Thales to maintain its elevated returns. Investors think Uniform ROA will stay around 25% for the next five years.

Take a look...

With defense spending set to remain strong, Thales has a lot of tailwinds behind it. Investors already realize the business will benefit from these macro trends.

While Thales has been on the market's radar lately... it's not the only defense company ramping up hiring.

American contractor L3Harris Technologies (LHX), British-based BAE Systems (BAESY), and German arms maker Rheinmetall (RHM.DE) plan on filling thousands of roles this year. So do many of their competitors.

These companies aren't growing on speculation... They know spending is on the upswing.

Investors seem to understand Thales' transformation already. That said, companies up and down NATO's military supply chain seem to be gearing up for something similar. Keep an eye out.


Joel Litman
July 9, 2024