The Q3 earnings season is well under way, with 84 S&P 500 members having reported quarterly numbers as of Oct 19. So far, the overall picture is one of all-around strength, with the growth pace of the first-half of the year continuing into Q3, and management commentary about underlying business conditions still favorable.

While quarterly earnings of the 84 S&P members — constituting 16.8% of the index’s total membership — were up 19.2%, revenues increased 8.4% from third-quarter 2017 level. The beat ratio for the bottom line was 82.1%, while that for the top line was 61.9% as of Oct 19.

Coming to projections for the Zacks Aerospace sector, which constitutes defense stocks, total Q3 earnings are expected to increase 16.8% year over year on 6.8% higher revenues as of Oct 17.  For more details, you can go through the latest Earnings Preview.

Defense stocks, which have been on a growth trajectory for past couple of quarters, courtesy of President Trump’s favored stance toward increased spending on the nation’s defense, saw a thriving Q3. On Jul 12, President Trump said that NATO allies agreed to raise their defense spending to 2% of their GDP by 2024. This led to a rally in defense stocks on the following day, leading to a rebound in the markets reeling under trade war fears. Meanwhile, a steady flow of contracts from the Pentagon continued to provide impetus to the stocks. Defense contractors also received a string of key contracts from foreign allies of the United States, hinting at growing international market for weaponries.

With more than 600 companies (154 S&P 500 members) slated to report Q3 results this week, let's find out where the following defense stocks stand before their earnings release on Oct 25.

L3 Technologies Inc. delivered a positive earnings surprise of 7.39% in the last reported quarter. Notably, the company outperformed the Zacks Consensus Estimate in the trailing four quarters, with an average beat of 7.05%.

In August, the company acquired Azimuth Security and Linchpin Labs, which are itself two market-leading information security businesses. In July, L3 Technologies acquired Applied Defense Solutions (ADS) — a leading aerospace engineering, software development and space situational awareness company — for approximately $50 million. This buyout is expected to generate approximately $15 million in sales for the remainder of 2018, which in turn should get reflected in third-quarter results.

However, L3 Technologies’ Aerospace Systems unit was unsuccessful in securing any notable order, contrary to its usual trend. This, in turn, is expected to hurt the Aerospace Systems segment’s top-line growth. 

According to the Zacks model, a company with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) has good chance of beating estimates if it also has a positive Earnings ESP. Unfortunately, L3 Technologies does not constitute that right combination. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

The company has an Earnings ESP of 0.00% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Please note that we caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions (read more: Will Buyouts Benefit L3 Technologies in Q3 Earnings?).

Raytheon Company delivered a positive earnings surprise of 5.60% in the last reported quarter. The company outperformed the Zacks Consensus Estimate in the trailing four quarters, with an average beat of 3.64%.

During the third quarter, the company’s Missile Systems segment secured some major contracts and agreements. Also, a significant milestone was achieved when Sweden became Raytheon’s 16th overseas customer by signing an agreement to purchase its Patriot system from the U.S. Army. Such impressive order inflows along with other notable developments should boost this unit’s top line in the to-be-reported quarter.

In addition, a transaction related to a group annuity contract was closed by the company this July. An unfavorable non-cash pension settlement charge worth $228 million, after tax, will be recognized in third-quarter 2018, primarily related to the accelerated recognition of losses in those plans. To this end, the Zacks Consensus Estimate for Raytheon's third-quarter earnings is pegged at $1.94 per share, mirroring year-over-year decline of 1.5%.

Raytheon has an Earnings ESP of +1.07% and a Zacks Rank #2, which increases the chances of an earnings beat this quarter (read more:Will Robust Order Growth Drive Raytheon's Q3 Earnings?).

Leidos Holdings, Inc. (LDOS Quick QuoteLDOS - Free Report) delivered a positive earnings surprise of 6.67% in the last reported quarter. The company outperformed the Zacks Consensus Estimate in the trailing four quarters, with an average beat of 7.56%.

The company has an Earnings ESP of +0.37% and a Zacks Rank #3. Therefore, our model shows that the company is likely to beat estimates this quarter.

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