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UPDATE 2-Honda Q3 profit jumps, ups 02/03 forecast

(Adds by-line, investor's comments, more details)

By Chang-Ran Kim

TOKYO, Jan 31 (Reuters) - Honda Motor Co, Japan's No. 2 automaker, on Friday posted a jump in its quarterly profits and raised its full-year forecast thanks to upbeat sales of the Pilot sport utility and other popular models in the United States.

Honda's operations are suffering in Japan due to slack demand and fierce competition, but its cars are rolling out of North American showrooms faster than supply can keep up. Honda is due to double capacity at its Alabama plant, which builds light trucks, to 300,000 units a year by spring 2004.

Honda posted a record net profit of 115.17 billion yen ($967.6 million) in the three months to December 31, the third quarter of its financial year. That was up 40 percent from the same period a year earlier.

The result exceeded analysts' consensus estimate of 104 billion yen for net profit. Operating profit was 158.98 billion yen, up 2.7 percent year-on-year and above analysts' average estimate of 156 billion yen.

Sales rose 13.3 percent to 1.99 trillion yen.

FULL-YEAR FORECASTS RAISED

After a surprising cut in full-year forecasts just three months ago, Honda reversed some of that on Friday to raise its net profit target to 430 billion yen from 410 billion yen.

The operating profit outlook for the year to March 31 was restated as 660 billion yen -- which would be a record high -- up from 620 billion predicted in October. Before that, Honda had expected the profit to total 720 billion yen.

Honda said it expected favourable currency swings to add 500 million yen to operating profit for the year. In October, it had predicted a negative impact of 26.5 billion yen.

Japan's second-biggest automaker said it now expects the euro to average 115 yen this business year, stronger than the 113 yen it assumed in October.

Its assumption for the dollar was tweaked to 123 yen from 122 yen.

A weaker Japanese currency benefits Honda by inflating the yen value of income earned abroad and making exports more profitable.

"The quarterly numbers look pretty strong, and the upward revision to their full year forecast is pleasing. But Honda was coming off a shock earnings report last October so it's hard to judge overall," said Hiroshi Mizutani, general manager at Asahi Life Asset Management Co Ltd.

Honda's shares have lost more than 20 percent since it announced disappointing half-year earnings in late October, compared with a 10 percent fall in the Tokyo exchange's transport equipment sector .

"Honda is doing very well in the U.S., but this dependence is also worrying because of the strengthening yen and the chance of a slowdown in consumer spending there," Mizutani said.

"In terms of historical valuations, Honda's shares are looking pretty cheap. But I don't regard this as a great time to buy Honda, or other automakers for that matter, because of worries about the global economy."

THRIVING U.S. OPERATIONS

In addition to the hot-selling new Accord, the Pilot SUV and Element light truck out last year, Honda will launch a new Acura sports sedan this spring, aiming to boost its total U.S. sales by eight percent in 2003 to 1.35 million vehicles.

"Honda's North American business is thriving: not only are sales of existing models firm, but all new models introduced since mid-2002 are also doing well," Goldman Sachs wrote in a report on Thursday.

Honda has also retained a high profit margin by standing firm on prices at a time when competitors have been forced to rev up sales incentives at the expense of profits.

Thanks to a strong brand image and a reputation for reliability, Honda has been able to keep its average incentives in the United States at by far the lowest in the industry, with estimates as low as $100 per vehicle.

By contrast, industry leaders General Motors Corp and Ford Motor Co have been under constant pressure to sweeten their price deals. In the latest move, GM on Thursday ratcheted up rebates on many of its most popular SUVs and vans to $2,500. (Additional reporting by David McMahon)