Backlog is visibility, not certainty

It traded at 188.62 this morning, -1.74% on the session. Defence and aerospace offers something almost nowhere else does, which is genuine multi-year revenue visibility. It is worth being precise about what that visibility covers.

What a backlog does and does not tell you

It tells you revenue is coming, roughly when, and roughly how much. That is real and unusual.

It does not tell you at what margin. A programme booked years ago at a fixed price, delivered into an inflated cost base, converts into revenue exactly as promised and profit considerably worse than assumed. The backlog was never wrong. It just was not measuring what people read it as measuring.

The questions each quarter

• The fixed-price share of the backlog, which is where cost overruns land on the contractor
• Whether any programme has taken a charge, and whether that programme is finished taking them
• Conversion rate, meaning how much of the backlog turns into revenue on schedule
• Aftermarket revenue as a share of the total, because that is the high-margin part and it follows the installed fleet rather than new orders

The case for the long side

The aftermarket. An engine or a system in service generates parts and maintenance revenue for decades, at margins the original sale rarely sees, and it is largely insulated from whether new orders are won this year.

The order book gets the attention. The fleet already flying pays the bills.

The risk to the view

Fixed-price programme charges. These arrive without much warning, they are frequently followed by more, and the market treats each one as the last until it is not. That has been the most reliable way to lose money in this sector.

I would abandon the view on a second charge on the same programme, because at that point the problem is the estimate rather than the event.