Honda Motor Co raised its annual profit outlook above market expectations as a recovery in the key U.S. market helps counter the strong yen and sliding Japanese sales, which weighed on third-quarter earnings.

Japan's top automakers are all expected to report a sharp decline in October-December profits as the end of subsidies for eco-friendly cars hits domestic sales and prices for raw materials such as steel rise.

But Japanese car makers have also taken steps to improve manufacturing efficiency and reduce fixed costs to keep profit margins relatively healthy, boding well for future earnings as the U.S. market recovers.

Honda's strong earnings were backed by strong growth in North America and Asia, said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments. Robust motorcycle demand in emerging markets also helped Honda's earnings. The recovery in the United States was especially positive for Honda.

Honda, which fell behind Nissan Motor Co to become Japan's third-biggest automaker last year, raised its operating profit forecast for the year to March 31 to 620 billion yen ($7.55 billion) from 500 billion yen. A survey of 20 analysts by Thomson Reuters I/B/E/S forecasts profit of 594 billion yen.

Honda lifted its net profit forecast to 530 billion yen from 500 billion yen.

Honda's profits could rise even further by the end of March as it has also set very conservative currency rate forecasts of 80 yen against the dollar and 105 yen against the euro, said Daiwa's Ogawa. Basically, we can't see any bad factors from the results.

The maker of the popular Accord and Civic models reported a 29 percent fall in October-December operating profit to 125.65 billion yen, from 177 billion yen a year earlier and beating the average 110 billion yen estimated by seven analysts surveyed by Reuters.

Nine-month profits easily exceeded Honda's previous full-year profit forecast.

U.S. RECOVERY, MODEL REVAMPS KEY

Robust sales growth in emerging markets has helped global automakers weather a fall in mature markets such as Europe, and Honda has especially benefited from its lucrative motorcycle business in lower-income countries. Its global motorcycle sales jumped 19 percent to a record 17.95 million units in 2010.

But a convincing recovery in the U.S. car market -- Honda's biggest -- is the main factor that has stoked optimism among investors, sending its shares up about 20 percent over the past three months, outperforming Toyota Motor and Nissan.

Looking ahead, Honda cut its global car sales forecast to 3.58 million vehicles in the current business year, down from a previous forecast of 3.615 million. But the auto maker kept its forecast for North America sales unchanged at 1.475 million cars.

While Hyundai Motor stole rivals' thunder in the United States last year with the biggest growth among major brands, many expect Honda to boost its share this year with the upcoming revamping of the high-volume Civic and CR-V models.

Honda's third-quarter net profit, which includes earnings made in China, was 81.12 billion yen, down 40 percent from a year earlier. Revenues fell 5.8 percent to 2.11 trillion yen.

Hyundai last week reported a record quarterly profit, although analysts say competition will heat up for South Korea's top automaker as other popular models such as Toyota's Camry undergo a remodeling.

Before the results were announced on Monday, Honda's shares ended down 1.4 percent at 3,475 yen while the benchmark Nikkei 225 average lost 1.2 percent. The stock has risen almost a fifth in the past three months, in line with rivals Toyota, which will report third-quarter results on February 8, and Nissan, which reports on February 9.

($1=82.10 Yen)

(Additional reporting by Chikafumi Hodo and Mariko Katsumura; Editing by Lincoln Feast)

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