The upcoming second-quarter earnings report from The Boeing Company (NYSE:BA) is likely to reveal a company and an industry in a good state of health. Despite the uproar around the potential for trade wars -- definitely not something beneficial to transportation stocks -- Boeing shares have put in an impressive performance so far this year, and investors will be looking for more. In this context, let's look at three things to focus on in the earnings presentation on July 25.

The wing of a Boeing 787 Dreamliner

Image source: Getty Images.

1. Commercial aircraft margins

Boeing's biggest near-term catalyst probably comes from its Boeing Commercial Airplanes (BCA) margin. The hike in full-year earnings and cash flow guidance given with the first-quarter earnings was largely due to the increase in BCA margin guidance from around 11% to 11.5%. And CEO Dennis Muilenburg believes it can reach 15% in the next few years. 

Boeing's plans involve cutting costs by reducing its own production expenses and pressuring suppliers for price cuts. At the heart of Boeing Partnering for Success (PFS) initiatives is the idea that suppliers can benefit from a guaranteed volume of work from Boeing, and that the company benefits from price cuts from suppliers.

Indeed, Muilenburg recently argued that the increases in volume implied in the company's planned acquisition of Embraer's regional jet business would lead to more price cuts.

Given the context of aggressive moves on costs, it's worth watching BCA margin guidance very closely.

2. Production ramps

Price cuts are one way that Boeing is putting pressure on suppliers, but they are also feeling the pinch from the company's production ramps. Strong order books and a multiyear backlog have encouraged Boeing to increase the production rate on the Boeing 737 from 47 a month in 2017, to 52 in 2018, and then 57 in 2019.

However, this is pressuring suppliers like fuselage maker Spirit AeroSystems, whose CEO Tom Gentile talked of "a significant challenge" meeting the production rate on the Boeing 737 program during the company's last earnings call. It's not just the increase in the production, but also the shift from the 737 Next Generation to the newer 737 MAX while suppliers have to provide components for other variants, too. For reference, Muilenburg expects 40% to 45% of 737s delivered in 2018 to be the 737 MAX version.

Muilenburg has referred to upward pressure on the 737 production rate -- producing more planes would reduce the lead time for airlines to receive aircraft, and therefore encourage more orders. But suppliers are feeling pressure, and Boeing only delivered 269 Boeing 737s in the first half of 2018 -- a rate of nearly 45 a month. The question is: Given the supply chain difficulties, will Boeing maintain its current 737 delivery forecast, let alone try to increase it? 

3. Boeing Global Services

It's well known that Boeing is muscling in on its suppliers' margins, but it's also trying to increase its own manufacturing of components, and generate more aftermarket and services revenue. Boeing Global Services (BGS) is sometimes overlooked, but in the first quarter, it contributed almost the same as Boeing's Defense, Space & Security (BDS) segment -- with each one accounting for about 22.5% of total earnings from operations.

In addition, BGS's mid-teens operating margin is higher than that of BCA or BDS. And the segment's recurring revenue helps reduce the cyclical aspect of Boeing's earnings. On the last earnings call, Muilenburg said that management aims to grow BGS "faster than the average services-market growth of 3.5% as we further expand our broad portfolio of services offerings and continue to gain market share." And the near-8% revenue growth in the first quarter suggests the aim is achievable.

The number to look out for here is the BGS order book. If orders grow more than the market rate discussed above, it's a safe bet that revenue also will, down the line. Boeing took orders worth $5 billion in the first quarter, and its service backlog is now at $20 billion. However, its forecast for BGS revenue in 2018 is just $15 billion to $15.5 billion. In other words, BGS is growing its order book much more than revenue -- a sure sign of strong growth to come.

Looking ahead

Boeing has had a good run in the last few years partly due to a strong commercial aerospace market and partly from executing its plans to dominate the aviation industry by increasing margin while preparing to generate more aftermarket and service revenue. Investors are hoping that the second-quarter results will confirm progress in these key areas.