Honda nearly triples profit outlook

TOKYO (Reuters) -- Honda Motor Co. nearly tripled its annual profit forecasts and more upside may be ahead, with the company taking a conservative view on the yen and with the effect of easing government incentives unknown.

Honda (HMC), the world's seventh-biggest car maker, has weathered the industry turmoil that drove two U.S. automakers to bankruptcy this year better than many as its profitable and dominant motorcycle business cushioned the blow.

Sales by the maker of Honda Civic cars have also turned up thanks to government sales incentives such as the United States' cash-for-clunkers program. That has helped Honda and others gradually lift production levels from a nadir earlier this year.

"The strong results and conservative views on the second half and currency rate assumptions will be positive for Honda's stock price," said Fumiyuki Nakanishi, manager at SMBC Friend Securities in Tokyo. "The stock will probably surge tomorrow."

Honda lowered its average dollar assumption to ¥85 from ¥90 for the October-March second half of its financial year to next March, lower than around ¥92 in trading on Tuesday. A weaker dollar crimps Honda's earnings in yen terms.

Honda bumped up its global car sales forecast for the full year by 3.3% to 3.40 million units from 3.29 million.

Still, some voiced caution about the longer-term outlook as the effect of government stimulus schemes fades and competition from rivals in South Korea heats up.

"I would like to wait a little bit more to see the effect of the end of government incentive programs before talking about Honda's outlook for the next year on," said Kazutaka Oshima, CEO of Rakuten Investment Management in Tokyo.

He added that Japanese makers were losing their quality advantage that could have made up for the price gap with their South Korean rivals such as Hyundai Motor Co, which he called Honda's "real rival".

Hyundai, the world's No. 4 automaker by sales in the first half of this year when combined with affiliate Kia Motor Corp last week beat forecasts with a record quarterly net profit that analysts said posed a threat to Japanese automakers.

Honda on Tuesday nearly tripled its operating profit outlook to ¥190 billion from ¥70 billion for the full year to March 31, 2010.

The seventh biggest car maker by first-half sales also nearly tripled its net forecast to ¥155 billion from ¥55 billion.

That topped consensus forecasts from 21 brokerages for Honda's operating profit for the full year to March 2010 to hit ¥139 billion, with net profit of ¥113 billion.

For July-September, Honda's operating profit fell 56% to ¥65.54 billion($712 million) from ¥148.85 billion in the second quarter last year as sales volumes fell and the yen strengthened against the dollar.

The result beat an estimate of ¥42 billion in a poll of five analysts by Thomson Reuters.

Net profit, which includes its earnings from the red-hot Chinese market, was ¥54.04 billion, against ¥123.32 billion last year.

Rivals Toyota Motor Corp. (TM) and Nissan Motor Co. (NSANF) are also expected to report improved second-quarter earnings next week, but Honda is seen making the most profit by far for the full year, partly due to its more flexible operations, fewer exports from Japan and a slim car line-up.

Still, auto executives are concerned about volatile currency moves and repercussions on demand when government stimulus measures around the world end.

Honda's sales in Japan, for one, have been powered by generous tax reductions on hybrids such as its new Insight model, and executives have said sales could suffer when the incentives run their course.

Shares of Honda gained 3.9% during the second quarter, outperforming Tokyo's transport sector subindex, which was flat. In contrast, Hyundai shares jumped 50% during the same period.

Honda ended down 1.9% at ¥2,845 on Tuesday before the results were announced, against the transport sector's 1.7% fall.