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Since I first argued here that Honeywell (NYSE:HON) had meaningful upside, the stock outperformed the Dow Jones by nearly 450 bps for a return of 11.6%. While I continue to believe that Honeywell merits the near "strong buy" rating on the Street, I am even more bullish on Eaton, which is well-positioned for multiples expansion.

From a multiples perspective, Eaton (NYSE:ETN) is the cheaper of the two. It trades at a respective 13.1x and 10.9x past and forward earnings while Honeywell trades at a respective 17.9x and 12.9x past and forward earnings. In addition, Eaton offers a slightly higher dividend yield at 2.8%. With strong trends in electrical equipment markets and trucking, Eaton still has more to rise after its 4.6% return for the year to date.

At the third quarter earnings call, Eaton's CEO, Alexander "Sandy" Cutler, noted strong performance

We had really a terrific third quarter. I think you've all seen many of the numbers: Revenues up 15%, EPS fully diluted number's up to 37%. And so when you look within that and we think there are 5 or 6 noteworthy points we want to share with you.

First, the operating earnings per share of $1.08 were an all-time record, eclipsing the previous record of the second quarter 2008 when revenues were still about 4% lower than they are today, and we think that really reflects the improved cost structure and the stronger margins across the company, as well as a lot of the diversification work that we've been doing.

As much as the top-line momentum was impressive, the greatest development was that more than one-fourth of business came from emerging markets. Put differently, penetration in the emerging markets grew year over year. By shifting exposure to high-growth regions, Eaton is de-risking the business from domestic stagnation. The American Trucking Association released figures that showed how November truck tonnage was up 6% y-o-y in November, accelerating off of October. This was the 24th y-o-y consecutive increase. As Eaton regularly outperforms its end markets, we can anticipate around upwards of 11% growth based on distributor reports that sales will grow 5-10% in 2012. Distributors have been growing inventories over the last six months, which indicates a relieving improvement in the North American electrical equipment markets.

Consensus estimates for Eaton's EPS forecast that it will grow by 42.4% to $4 in 2011 and then by 12.3% and 14.5% in the following two years. Assuming a multiple of 14x and a conservative 2012 EPS of $4.46, the rough intrinsic value of the stock is $62.44, implying 29.1% upside. If the multiple were to decline to 11x and 2012 EPS turns out to be $4.35, the stock would barely decline. Accordingly, Eaton has very favorable risk/reward.

Analysts, however, are even more bullish about Honeywell. Margins, ROIC, and net cash are all showing positive moment. And the excellent results in the third quarter- with EPS being above the high-end of guidance - only further solidifies the Street's confidence in Honeywell's operational performance. I am particularly attracted to how the company is improving productivity, generating solid EPS growth, and minting solid exposure in turbo, aerospace, and ACS.

Consensus estimates for Honeywell's EPS forecast that it will grow by 34.7% to $4.04 in 2011 and then by 9.9% and 11.9% more in the following two years. Assuming a multiple of 16x and a conservative 2012 EPS of $4.38, the rough intrinsic value of the stock is $70.08, implying 22.1% upside. Modeling a CAGR of 18.3% for EPS over the next three years and then discounting backwards by a WACC of 9% yield an even smaller figure of $62.57. Thus, while the company still is undervalued, much of the discount has been closed - making Eaton the more attractive pick.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Eaton's 30% Upside Is Greater Than Honeywell's