Volkswagen, Peugeot and Fiat defy sector gloom

PARIS/FRANKFURT (Reuters) - Volkswagen (VOWG.DE) led a trio of European automakers which issued surprisingly strong results and held to full-year targets on Wednesday, sending their shares higher despite analysts warning the second half will be tough.

Volkswagen, Europe's No. 1 and the world's No. 4 auto group, said second-quarter operating profit rose 22 percent to 2.12 billion euros ($3.38 billion), easily topping market expectations.

A Reuters poll of 20 analysts forecast operating profit would rise on average to just 1.81 billion euros in the quarter, putting VW on track for an estimated 6.61 billion for the full year or a rise of 7.5 percent.

VW stuck to its guidance for improved results over last year's record figures, although it gave no specific targets.

Smaller rival Peugeot Citroen (PEUP.PA) repeated its 2008 operating margin target of 3.5 percent, confounding analysts who had expected a trimmed target.

But both companies, and world No. 2 truck maker Volvo (VOLVb.ST), warned of a tougher environment ahead as consumers curb spending and metals prices remain high.

While companies have managed to slash costs, car sales are down in big markets -- the United States, Europe and Japan -- where consumers are feeling the pinch of record fuel prices and rising interest rates as a global financial crisis deepens.

In the United States, first-half car sales fell 9.7 percent to a 15-year low. In Europe, sales fell 7.9 percent in June, and in Japan car sales were down 3.6 percent. But sales in the emerging markets of Brazil, Russia, India and China have soared as those countries show resilience to the economic slowdown.

Volvo reported a bigger-than-expected second-quarter rise in pretax profit and stuck to its outlook for its main markets this year, but warned of growing consumer caution.

Fiat (FIA.MI) confirmed its targets for this year and the next after posting a 19.6 percent rise in quarterly profit to 1.13 billion euros, beating average market expectations.

French carmaker Renault (RENA.PA) reports on Thursday.

Volkswagen found savings in its production costs, PSA closed some production lines in plants to boost capacity utilization and cut some 10,000 jobs in west Europe. Fiat idled some plants.

SHARES RISE, SPREADS NARROW

Shares in Peugeot rose 8.9 percent, Volkswagen 5.2 percent and Fiat rose 11.9 percent, helping to lift the DJ Stoxx European auto index .SXAP 4.4 percent. The index has lost around 25 percent this year. Volvo fell 2.3 percent.

Five year credit default swaps on Fiat were 23 basis points tighter at 230 basis points, Peugeot was 13 basis points tighter at 159 and VW about 7 at 118.

Most car makers are cash positive but some analysts worry the market downturn could burn away cash piles in two years.

Volkswagen's quarterly operating margin rose to 7.2 percent -- its best in recent memory -- thanks to streamlining its cost base and boosting productivity.

Credit Suisse's Arndt Ellinghorst said the 300 million euro gap over expectations was driven by VW's so-called "other operating profit" line that accounts for factors such as currency hedging gains or releases from warranty provision.

"The operating environment has become tougher and is demanding considerable efforts from the automotive industry," VW Chief Executive Martin Winterkorn said. "This does not make it easy for us. However, we are well positioned and have the right strategy to master the tasks ahead of us."

Peugeot Chief Executive Officer Christian Streiff said he believed a 2010 margin target of 5.5-6.0 percent was still achievable, although the company would have to work harder.

"We are all very aware of the uncertainties for the remainder of the year and thereafter," he told analysts.

Streiff said PSA would hike vehicle prices to compensate for a 2.5 percent cost rise due to higher raw materials such as steel and he added he expected other car makers to do the same.

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

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

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 programs were starting to show some benefits.

Volkswagen had a net profit of 1.643 billion euros, up 34.8 percent. PSA said net income rose 49 percent to 733 million and at Fiat the net rose slightly to 604 million from 593 million.

(Additional reporting by Giles Castonguay in Milan and Arno Schuetze in Hanover; Editing by Louise Ireland)