UPDATE 4-Peugeot Citroen keeps margin target as H1 rises

(Adds more market reaction)

By Marcel Michelson

PARIS, July 23 (Reuters) - Europe's second-biggest car maker, PSA Peugeot Citroen (PEUP.PA), on Wednesday stuck to its operating profit margin target for 2008 as first-half earnings rose more than expected on the back of cost cuts.

Its shares soared almost 10 percent on relief that the group had not abandoned its targets as some analysts had expected. At 0752 GMT, the share was up 8.14 percent at 34.55 euros and the DJ Stoxx European autos index .SXAP was up 2.24 percent.

It was the biggest riser in the index and Fiat (FIA.MI), due to report later on Wednesday, gained 4.2 percent.

PSA repeated it expected a slowdown in western European markets of around 4 percent this year and a more difficult second half.

"We are all very aware of the uncertainties for the remainder of the year and thereafter," Chief Executive Christian Streiff told an analysts' conference. He added he believed a 2010 target of a margin of 5.5-6.0 percent was still achievable, although the company would have to work harder.

Car sales are down in Europe amid fragile consumer confidence, record fuel prices, rising interest rates and fears of a car market plunge in the wake of the financial crisis that began in the U.S. subprime mortgages sector.

Finance Director Isabel Marey-Semper said European car makers had not expected the market softness experienced in June.

"The company reiterated all targets, but we believe the writing is on the wall and the second half will be tough," Adam Jonas at Morgan Stanley wrote in a note.

Recurring operating income was up 32.4 percent at 1.115 billion euros ($1.78 billion) against analysts' average expectation of 1.034 billion in a Reuters poll.

The operating margin for the first half was 3.6 percent, against 10 analysts' average forecast of 3.3 percent and versus 2.7 percent last year.

The company expected a negative impact from higher raw material prices of 300-350 million euros in 2008 versus 2007.

The French group kicked off European car makers' earnings, with larger German rival Volkswagen (VOWG.DE) also due on Wednesday and Renault (RENA.PA) on Thursday.

World number two truck maker Volvo (VOLVb.ST) reported a bigger-than-expected second-quarter rise in pretax profit and maintained its outlook for its main markets this year, but warned of growing consumer caution.

TROUBLE AHEAD

Several analysts have slashed earnings estimates for European car makers, with Morgan Stanley this week cutting its 2008 estimates by 10 percent and those for 2009 and 2010 by 25-30 percent due to the weak market and high raw materials.

Lehman Brothers, Credit Suisse and Citigroup also see trouble ahead for car makers, just as several profitability programmes were starting to show some benefits.

PSA, in which the Peugeot family still owns a 30 percent capital stake and holds 45 percent of the votes, is in the second year of its Cap 2010 plan drawn up by Streiff to boost margins by selling more cars in more countries.

PSA said it had achieved 882 million euros in cost cuts, partly because it had shed about 10,000 jobs since June 2007 and now employs some 162,500 people in western Europe.

The cost cuts were also due to a drop in warranty expenses, overheads and fixed costs and higher productivity.

Higher raw material costs, wages and negative foreign exchange movements such as the weak pound, eroded earnings by 461 million. Peugeot Citroen uses a pound rate of 80p per euro.

Inventories of unsold cars rose to 668,000 from 604,000 in December, partly due to the launch of new models. (Reporting by Marcel Michelson; editing by Sue Thomas, Paul Bolding)