Honeywell (HON) reported fantastic third-quarter results Friday that showed strong organic revenue growth and impressive margin improvement. We liked the firm’s performance and outlook, and we are maintaining our $61 fair value estimate.

The conglomerate’s revenue advanced 14%, with 8% coming organically – a level matching General Electric’s (GE) organic expansion during its quarter. Honeywell’s third-quarter performance was driven particularly by aerospace, an industry which we continue to overweight in our best ideas portfolio. We firmly believe the build rates by Boeing (BA) and Airbus (EADSY.PK) will accelerate in coming years thanks to the jet makers’ massive backlogs and material narrowbody rate increases. Honeywell, as well as a number of other component suppliers, are well-positioned to capitalize on this strength. Honeywell’s Automation and Controls Solutions segment also put up a solid quarter, with organic revenue advancing 4%--trumping concerns regarding the segment raised by Ingersoll Rand’s (IR) negative earnings pre-announcement a few weeks ago. Revenue in the firm’s Transportations Systems segment jumped 22% thanks to higher global vehicle and passenger turbo vehicle volumes, while Specialty Materials also saw sales expansion of 25% thanks to strength at UOP, an organization specializing in process technology for oil refining and other energy-related systems.

Honeywell’s third-quarter earnings-per-share growth was nothing short of stellar, up 45% from the same period a year ago. Segment profit in its aerospace segment jumped 16%, as segment margins advanced 120 basis points. At Automation and Controls Solutions, segment profit increased 15%, as segment margins nudged 20 basis points higher. Segment profit at Transportation Systems and Specialty Materials were particularly impressive, increasing over 30% at both, with segment margins expanding nearly 100 basis points in the quarter for each. The firm did an excellent job converting earnings to free cash flow as well, pulling in nearly $900 million during the period.

Honeywell also provided a rosy outlook, despite cautioning that there are some concerns about slowing growth. CEO Dave Cote, on the firm's third-quarter conference call:

“Turning to 2012, while we're not denying the potential for another recession, we think the high probability outcome is a slow growth economic environment. We're still in the early stages of our planning. However, we believe we're well positioned for growth across all 4 of our business segments again next year, given what we're seeing in our major end markets, the size of long cycle backlog, the strength of our execution and what we've been able to do with advance repositioning.”

Honeywell expects positive organic growth through the remainder of 2011 and for 2012 (and earnings growth 2 to 3 times that of top-line expansion). As for full-year 2011 guidance, the firm expects revenue to hit $36.7 billion at the high end of the range and pro-forma earnings per share to reach $4.05 (up from $4), representing about 35% growth on the bottom line. Free cash flow guidance for the year was also robust, at $3.5 billion.

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