It has been a tense couple of years for firms operating in the cyclical industrial and aerospace industries. But the best-run firms have used the downturn to become more disciplined with their businesses, cutting costs and preparing for an eventual economic upturn. Honeywell (NYSE:HON) fits firmly into this camp, and its second quarter results and outlook gave investors confidence that the company remains on the right track.

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Second Quarter Recap
Sales advanced 14% to $9.3 billion. Its largest segment is automation and controls, which grew almost 20% and weighed in at nearly 43% of quarterly sales and sells a wide array of sensors and controls, including devices to control air conditioning and water flow. Key competitors include Eaton (NYSE:ETN) and Emerson (NYSE:EMR). The next largest unit is aerospace and it posted 6.2% growth to account for 31% of sales. Aerospace competes with United Technologies (NYSE:UTX) and General Electric (NYSE:GE) by providing engines, systems and related avionic services. Specialty materials and transportation systems rounded out the four primary businesses and posted robust growth of 11.7% and 26.4%, respectively.

Segment profits grew 20.6% to $1.3 billion and improved across every division. Backing out corporate overhead, operating income jumped 43.4% to $1.1 billion and net income improved a similar 43.1% to $810 million, or $1.02 per diluted share.

Outlook
For the full year, analysts covering Honeywell currently expect sales growth in a range of $36.1 billion and $36.7 billion, or an increase of between 12 and 14% from 2010. Its earnings guidance is between $3.85 and $4 per share, or as much as 33% growth from last year.

The Bottom Line
Based on current guidance, Honeywell's sales and earnings are forecasted to exceed 2008 levels, meaning the credit crisis has cost its industrial-based businesses roughly three years of growth. However, free cash flows have improved over this period and should grow off the $3.6 billion, or $4.60 per diluted share they came in at last year.

Free cash flows tend to exceed reported earnings, meaning management is very savvy at keeping capital expenditures low and pushing through other efficiencies, such as working capital management. At a forward P/E of 14 and trailing free cash flow multiple of just over 12, the valuation is reasonable and represents an arguably solid entry point as Honeywell is well positioned to take advantage of an eventual and sustainable recovery in global industrial economic activity. (These decision-making tools play an integral role in corporate finance and economic forecasting. To learn more, see Using Decision Trees In Finance.)

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