Safran ($SAF.PA) - Aerospace & Defence

A sector worth flying into, with caution on the company

Introduction

It is July and that means it is time for Tour de France. While the victory in Tour de France will elude the French again this year (as it has done every year after 1985). However, let´s take the opportunity to focus in on some of the companies that are the backbone of France´s industrial complex and key constituents of the CAC 40. We will cover this in four stages. Stage 1 is Aerospace and Defence. Let´s dove in!

The global aerospace and defense (A&D) sector is enjoying a powerful tailwind. From record-breaking civil aircraft backlogs to a dramatic re-armament trend across NATO-aligned nations, the sector is structurally positioned for long-term growth. Among the top French industrial champions, Safran occupies a critical position in this ecosystem. As co-owner of the CFM International joint venture and a key supplier to Airbus and Boeing, Safran is a top-tier engine, defense, and avionics systems player. But while the sector looks bullish, caution is necessary when it comes to the company’s valuation and near-term margin expectations. Let’s explore why.

Sector Outlook: Aerospace firing on all cylinders

The backdrop for aerospace is highly supportive. The Paris Air Show 2025 reaffirmed a strong outlook for both civil and defense aviation:

• Civil: Over 41,000 new aircraft deliveries are forecast over the next 20 years, with more than 70% expected in the single-aisle category. This means high demand for engines like the LEAP series, co-developed by Safran and GE.

• Defense: A global multi-year upcycle in military spending is underway, with Europe targeting defense budgets closer to 3-5% of GDP. Safran is deeply embedded in defense programs like the Rafale fighter, A400M, and satellite propulsion systems.

• Sustainability: The aviation industry is committed to net-zero by 2050. Safran’s RISE program (a next-gen open fan engine with 20% fuel savings and SAF compatibility) places it at the frontier of clean aerospace propulsion.

Combined, these structural themes make aerospace one of the most attractive industrial sectors for long-term investors.

Strategy: Dual growth engines – Civil & Defence

Safran’s strategy rests on four pillars:

1. Civil aviation – LEAP and CFM56 Engines

   • The LEAP engine fleet (now at ~8,800 units) is expanding rapidly and is expected to more than double by 2030.

   • CFM56, despite being a legacy product, still has 23,000 engines in service, with the majority yet to go through a second shop visit. This supports robust aftermarket revenue for years.

   • The company expects >5,000 LEAP shop visits by 2040, indicating strong annuity-like revenue streams.

2. Defense & Space

   • Safran is positioned on the Rafale fighter jet, various European defense programs, and satellite propulsion systems.

   • Its guidance systems, optronics, and AI-enabled platforms (via acquisitions like Preligens) offer optionality in higher-margin segments.

   • Defense & Space revenues are expected to double by 2030.

3. Aircraft equipment & Interiors

   • A more volatile business, but one that adds scope and vertical integration.

   • Margins are improving but still lag the group average.

4. Technology investment – RISE Program

   • Long-term investment in disruptive propulsion architecture via the RISE open fan engine, developed with Airbus.

   • ~350 successful tests already achieved, with a flight demonstrator planned.

Safran’s business model has high barriers to entry and generates recurring cash flows from long-life engine platforms. In many ways, it mirrors the razor-and-blade model, with new engine deliveries feeding a decades-long aftermarket.

Financial performance

H1 2025 is expected to be strong:

• Propulsion EBIT margins are expected to reach 23%, boosted by a high proportion of spare engine deliveries.

• Group EBIT margins are expected to expand to 16.4% in H1 (vs 15.1% in 2024).

• Spares revenue growth is expected at ~14% for Q2, though momentum is tapering.

H2 2025 will likely normalize:

• Spare engine mix is expected to fall.

• CFM56 flying hours have turned negative as of late May, suggesting lower utilization-driven revenues.

Key Figures (2025 estimates):

• Revenue: €30.6bn

• EBIT: €4.9bn

• EPS: €7.57

• Free Cash Flow: €3.3bn

• Net cash: €3.5bn

The outlook beyond 2025 remains strong, with management targeting:

• Revenue CAGR ~7.5% (2024–2029)

• EBIT CAGR ~13% (same period)

• ROIC >30% by 2026

Safran is also investing heavily in MRO (maintenance, repair, overhaul), with €1bn capex allocated to increase capacity and capture the LEAP aftermarket growth.

Valuation: Premium price, limited upside

At a share price of €270 (July 2025), Safran trades at:

• 35x 2025 estimated P/E

• ~17x 2025 estimated EV/EBITDA

• FCF yield: ~3.0%

This valuation embeds a great deal of optimism. While Safran is a quality asset with strong long-term prospects, the market seems to be pricing in near flawless execution.

Even assuming €10 EPS by 2026 and a 26x multiple, upside appears capped around €260-270, limiting the risk-reward at current levels.

Conclusion: Bullish on the sector, cautious on the stock

The aerospace sector is in a secular bull market. Passenger traffic growth, defense rearmament, and sustainability initiatives provide a powerful multi-decade runway for growth.

Safran is well-placed in this ecosystem and should be a core holding for long-term investors. However, with the stock already pricing in aggressive margin and revenue growth, caution is warranted in the near term.

I don’t have a position in Safran, however, I do find the sector attractive and consider it a relatively safe place for several years to come. The above is not intended as investment advice.

With that, thanks for reading I truly appreciate the interest. Below are a few ideas for further readings and inspirations.