By now you've probably heard the news: Boeing (BA -1.91%) beat on Q4 earnings, and its stock is off to the races.

Boeing stock surged 5% last Wednesday after the company reported analyst-estimate-beating profits of $7.61 per share, and it promised to grow "core earnings" by at least 25% in 2017 despite a sharp slowdown in sales of new commercial jets. And yes, all of this is good news -- but what defense investors really want to know is how Boeing's defense business is doing.

So, let's talk about that.

Boeing KC-46 refueling tanker.

Boeing's KC-46 tanker is one of only a few Boeing aircraft whose deliveries are guaranteed to increase in years to come. Image source: Boeing.

Boeing Defense

In addition to being the world's biggest producer of commercial airplanes, Boeing is also one of the world's biggest defense businesses -- and this is key to understanding Boeing stock. Commercial Airplanes may provide 69% of Boeing's revenue, but according to data from S&P Global Market Intelligence, Commercial Airplanes contributes only 54% of the company's profits. The bulk of Boeing's remaining business comes from its big Defense, Space & Security division, which comprises three parts: Military Aircraft, Network & Space Systems, and Global Services & Support.

Combined, these three units produce $29.5 billion in revenue annually -- less than half of Boeing's sales from Commercial Airplanes. But they earn Boeing $3 billion in profits -- nearly as much as the $3.1 billion that Boeing earns from a Commercial Airplanes business that's twice as big. In total, Boeing Defense, Space & Security boasts a 10.2% operating profit margin that's more than twice as robust as the 4.8% margin Boeing's civilian business earns.

In short, Boeing Defense is arguably Boeing's most important business.

Defense is big business -- but business isn't booming

This gives some cause for concern, because 2016 wasn't exactly a great year for Boeing's defense business. $29.5 billion in sales may sound like a big number, but it was actually down 3% for Boeing in 2016. Combined with a 60-basis-point slippage in operating profit margins, operating profits at Boeing Defense declined 8% year over year.

Deliveries-wise, Boeing reported increases in the pace of deliveries of P-8 Poseidon sub-hunting aircraft (18 units delivered, versus 14 in 2015), in F-15 fighter jets (15 versus 12 in 2015), and new and remanufactured AH-64 Apache attack helicopters (65 versus 61). On the other hand, deliveries of C-17 Globemaster transport aircraft declined (from five in 2015 to four in 2016), as did deliveries of F/A-18 fighters (35 in 2015, dropping to 25 in 2016), and CH-47 Chinook helicopters (57 new and remanufactured units delivered in 2015, falling to 50 deliveries in 2016).

Looking forward, Boeing noted that its defense business still has $57 billion in backlog going into 2017, and it boasted that 37% of this future revenue will come from international customers. What Boeing failed to mention was that last year, defense backlog stood at $58 billion, with 40% coming from the all-important global growth market. And in 2017 in particular, Boeing's guidance calls for total defense revenue of between $28 billion and $29 billion -- about $1 billion less than Boeing collected in 2016.

Granted, all of this news came before the Pentagon announced a big $2.1 billion buy of Boeing's KC-46 refueling tankers. But the long story short is still this: Boeing's defense business shrank in 2016, it looks likely to shrink further in 2017, and it will probably fall even further in years to come.