The French electronics company Thales (XPAR:HO) develops information systems and services for the aerospace, defence and security markets. Midway through 2007, its stock was listed at around 45 euros and company was posting margins of 7%. However, deficient project management caused its shares to trade below 30 euros for most of 2010, with very low margins of approximately 2% for that period. We thus took this as an opportunity to build most of our position and continued buying until the share hit the minimum lows in December 2011 (below 22 euros/shares), when Thalesreported margins of 6% in the shadows of the 10-12% that its competitors such as General Dynamics were reporting.
Such a visible difference in the margins made us ask ourselves why Thales wouldn’t also be able to generate such margins doing things the right way. The entry of Dassault Aviation (whose shares we also held at this moment) in the middle of 2009, which bought over 25% of the share capital, was also a key factor in our investment assumption, since it would help Thales develop projects thanks to Dassault Aviation’s already solid reputation for excellent project management. Hardly more than 8 years later, the company has posted its first-quarter earnings for 2018 and forecast for the next 3 years that entail a turnover increase from 3% to 5% and margins standing at approximately 11%. With a share price surpassing 110 euros in 2018, the upside since 2011 has exceeded 400%.
From Francisco Garcia Parames' second quarter 2018 shareholder letter.
