By Myra P. Saefong

Shares of Honda climbed Wednesday, taking other Japanese auto stocks with it, as investors cheered the company's better-than-expected second-quarter profit and bet that other companies in the sector will follow suit.

"We expect the upcoming earnings announcements and the full-year numbers (for Japanese automakers) to meaningfully beat expectations," Clive Wiggins, an analyst at Macquarie, wrote in a recent note to clients.

After Tuesday's stock-market close in Tokyo, Honda Motor Co. (HMC) reported a 56% drop in net profit for the second quarter compared with a year ago, but its earnings beat analyst expectations amid strength in sales of fuel-efficient cars in Japan. The country's second-largest automaker also raised its fiscal-year profit forecast.

Shares of Honda climbed by as much as 5% Wednesday, ending the morning session 3.7% higher.

Toyota Motor Corp. (TM) saw its stock climb 1.1%, and Nissan Motor Co. (NSANY) tacked on 1.2% in Tokyo.

Gains in the auto stocks came in contrast to a fairly broad decline in Asian markets. Japan's benchmark Nikkei 225 Average was down 0.7% by the end of the morning trading session. Australia's S&P/ASX 200 was off 0.9%, Taiwan's Taiex fell 0.5%, and Korea's Kospi was down 1.6%. Hong Kong's Hang Seng Index lost 0.1%, but China's Shanghai Composite added 0.3%, and New Zealand's NZX-50 rose 0.4%.

Honda takes the lead

Honda was likely to be the only one of Japan's seven major automakers to turn a profit for the first half of the fiscal year, according to a report in the Nikkei newspaper last week, ahead of the carmaker's results.

Its first-half net income of 61.5 billion ($672.2 million) was down 79.2% from a year ago, but much better than the operating loss of 10 billion yen the company had itself expected earlier.

And "Honda's commitment to profit in the [second half], even under severe forex assumptions (to 85 yen/U.S. dollar from 90 yen/U.S. dollar), highlights it ability to control costs, and we think this will be positive for the shares," analysts at Goldman Sachs wrote in a research note Wednesday.

Risks for Honda shares still include those fluctuations in the yen, as well as a sharp decline in global auto demand, according to a note from Kohei Takahashi, an analyst at J.P. Morgan.

But Global Hunter Securities consumer strategist Richard Hastings cited comments by Honda Vice President Koichi Kondo, who said the company is benefitting from sales in emerging markets where currencies are strong enough to offset the yen's own strength against the U.S. dollar.

"This means export nations can enjoy strong buying power and stronger currencies, while the U.S. is very slowly trying to turn around its export economy with a relatively weak currency," Hastings said.

As a result, he said, "there's more to the auto-maker news overnight than just unit sales. This is another defining point along a curve to deeply embedded macroeconomic shifts, with forex dilemmas all over the place," he said.

Underestimating the majors

Macquarie's Wiggins lowered his operating profit estimates last week for the fiscal year ended in March 2012 for Japan automakers by around 3% to 5% to reflect sales and production trends, as well as a more cautious currency assumption for the dollar-yen rate.

But even so, he expects strong earnings delivery from the second-quarter numbers and said outlooks are likely to be raised across the board.

"While we think that the medium-term earnings recovery for auto makers is likely to be drawn out, we are bullish on the near-term prospects for the sector," said Wiggins.

He said he likes Honda because he expects returns to "consistently outpace market expectations."

But he also likes Toyota because "sentiment and share price performance has lagged despite a brisk upturn in volumes."

Toyota, Japan's largest carmaker, will report its financial results on Nov. 5.

The results consensus for Toyota's fiscal year ending March 2010 likely "substantially underestimates the margin recovery likely to take place through the course" of the fiscal year, said Wiggins.

Toyota's expected to post a net loss of 134.38 billion yen for the fiscal year, according to a mean estimate of brokers surveyed by Thomson Reuters.

Wiggins also expects Nissan Motor to delivery a "strong set" of numbers in the next one or two quarters. Nissan reports its latest financial results on Nov. 4.

"We believe the worst is clearly over for the auto maker, and there is no longer a crisis, but we also continue to feel that the medium-term earnings recovery will trend below market expectations," Wiggins said.