Honda Motor Co <7267.T>, Japan's No.2 automaker, forecast a 10 percent rise in operating profit this year as demand in its biggest and most profitable U.S. market recovers from a multi-decade low.

Honda, also the world's top motorcycle maker, is well positioned to gain from a steady rise in U.S. sales with its fleet of fuel-efficient models, which will see the addition of the CR-Z sporty hybrid in North America in a few months.

Falling sales in Europe remain a drag, but analysts expect strong growth in U.S. as well as China and other Asian markets to keep Honda on track to expand its profits and outperform rivals at home, while countering stiff competition from neighboring South Korea.

Japanese carmakers are more oriented toward U.S. sales and will likely benefit more from the U.S. market recovery than Hyundai <005380.KS> and Kia <000270.KS>, said Ahn Sang-Jun, an auto analyst at Tong Yang Securities in Seoul.

It looks right to buy Japanese carmakers now.

For the year to end-March 2011, the maker of the Civic and Accord models forecast an operating profit of 400 billion yen ($4.3 billion), up from the 363.8 billion yen it made in the year to March 2010. It sees net profit growing 27 percent to 340 billion yen this year, after a near doubling last year.

Honda, the first big Japanese automaker to report fourth-quarter results, is expected to have booked the biggest profits in 2009/10 among its peers, helped by a lucrative and fast-growing motorcycle business.

HYBRID HURDLES

Operating profit for the January-March quarter just ended was 96.1 billion yen, compared with a loss of 272.1 billion yen a year earlier, when it cut back production to reduce inventory.

The result was slightly higher than the 94 billion yen average estimate in a poll of 19 brokers according to Thomson Reuters I/B/E/S.

Fourth-quarter net profit came to 72.2 billion yen versus a loss of 180 billion yen a year ago.

Naoki Fujiwara, a fund manager at Shinkin Asset Management in Tokyo, said the profit outlook appeared conservative.

It's got environmentally friendly auto technology. It's got cost-consciousness. And it focuses on compact cars, Fujiwara said. All of these are required of the auto industry today. I don't see Honda's competitiveness eroding any time soon.

Honda expects sales to grow 6.6 percent to 3.6 million vehicles this year, led by a 14.1 percent rise in the North American market. Sales in Japan and Europe are expected to dip.

One threat for Honda and other Japanese automakers is a strengthening yen, which hits repatriated profits and makes their products less price competitive versus rivals.

Honda forecast the yen to average 90 to the dollar and 120 to the euro, compared with current levels around 93 and 123, respectively.

In the medium term, Honda CEO Takanobu Ito, a 32-year company veteran and former chassis designer, will be under pressure to speed up development of a new, more fuel-efficient hybrid system to power its bigger vehicles to compete with Toyota Motor Corp <7203.T> and a growing number of automakers launching full hybrid cars.

Honda's one-motor hybrid system has the advantage of being simple and cheaper, but lacks the power to be mounted on anything bigger than a CR-V crossover.

Shares in Honda have gained 6.4 percent in the year to date, outperforming a 1.2 percent rise in Tokyo's transport subindex <.ITEQP.T>. Before the results, Honda ended down 1.5 percent, while the sector index fell 1.2 percent.

(Reporting by Chang-Ran Kim and Lincoln Feast; Editing by Ian Geoghegan)

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