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Honeywell (NYSE:HON) and United Technologies (NYSE:UTX) have been on a roll, yielding solid double-digit returns for the year to date. Both companies have impressive fundamentals and have taken appropriate measures to address inevitable defense cuts. Based on my review of their strengths an DCF model, I find safe 20% upside for both companies.

From a multiples perspective, United Technologies is the cheaper of the two. It trades at a respective 15.3x and 12.4x past and forward earnings with a dividend yield of 2.3%. Honeywell, on the other hand, trades at a respective 25.7x and 12.1x past and forward earnings with a dividend yield of 2.5%. According to T1 Banker, United Technologies is also preferred at a "strong buy" versus just a "buy" for its competitor.

At the fourth quarter earnings call, Honeywell's management noted an excellent close to the year:

[W]e had another great quarter marked by terrific execution with continued growth in most of our end markets. And then yielded earnings per share above the high end of the previous range. Our reported sales were $9.5 billion, up 8% reported or 7% organic, reflecting continued advancement in our new products and the focus on high-growth regions. We ended the year with segment margins of 15.1%, expanding 90 basis points over the fourth quarter of last year. Then pro forma earnings per share were $1.05, up 21% over last year. Free cash flow was an impressive $1.4 billion in the quarter, reflecting 169% net income conversion prior to a $250 million cash pension contribution. Our 2011 performance underscored our balanced portfolio mix and strength of execution. New products, geographic expansion and traction on key process initiatives, all translated to record organic growth, margin expansion, high-quality earnings performance and strong free cash flow generation. And we did all this while continuing to maintain our seed-planting for the future.

Fourth quarter results were terrific with the top-line up 4.8% y-o-y, driven by a 20% y-o-y rise in commercial aerospace. Even defense declines - the source of apprehension for investors - were swallowable. Operating margins of 14.9% grew 70 bps y-o-y and emerging markets now make up about one-fifth of business. Management is further well position the company to benefit from strong secular trends in energy efficiency as it invests in environmental controls and improves scale.

Consensus estimates for Honeywell's EPS forecast that it will grow by 9.9% to $4.45 in 2012 and then by 11.7% and 12.5% in the following two years. Assuming a multiple of 15x and a conservative 2013 EPS of $4.93, the rough intrinsic value of the stock is $73.95, implies 23.5%.

United Technologies similarly has safe upside, if not safer upside given that is 28.6% less volatile. The one area of uncertainty concerns financing the $16.4B Goodrich (NYSE:GR) takeover. It has been speculated that the company will sell off non-core assets to limit the impact of issuing $4B worth of equity. At the end of the day, however, Goodrich is a perfect acquisition since it dramatically improves both scale and pricing power. And on the organic side, management is making solid investments in aircraft engines to sustain momentum for Pratt and Whitney. As the company is the sole engine producer of joint striker F-35, it is relatively less vulnerable to defense cuts.

Consensus estimates for United Technologies' EPS forecast that it will grow by 1.8% to $5.59 in 2012 and then by 20.8% and 14.8% in the following two years. Assuming a multiple of 15x and a conservative 2013 EPS of $6.66, the rough intrinsic value fo the stock is $99.90, implying 19% upside.

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

Additional disclosure: The distributor of this research report is not a licensed investment adviser or broker dealer. Investors are cautioned to perform their own due diligence. We seek business relationships with all of the firms in our coverage, but research covered in this note is independent and prospectively commissioned. Always discuss investments with a licensed professional before making any financial decision. Statements made within this report may include “forward-looking statements” as stipulated under Section 27A of the Securities Act of 1933, Section 21E of the Securities Act of 1934, and the Private Securities Litigation Reform Act of 1995. Since these statements are uncertain, actual results may be materially different from those expected.

Source: Honeywell, United Technologies Both 'Buys'