Volkswagen, Peugeot and Fiat defy sector gloom

By Marcel Michelson and Christiaan Hetzner

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.