DaimlerChrysler's Q2 seen strong, long-term tough

, European Auto Correspondent

FRANKFURT, July 15 Madeline Chambers of Reuters reported that automaker DaimlerChrysler AG is set to post strong second-quarter results on Thursday, helped by further improvement at its U.S. Chrysler arm, even as analysts warn the long-term outlook looks less rosy.

The world's fifth-largest automaker is expected to gain from robust second-quarter production in the U.S., driven by healthy demand and by a favourable seasonal effect that will also help rivals Ford Motor Co and General Motors Corp.

A Reuters poll of 18 analysts put average expectations for second-quarter adjusted operating profit for the German group at 1.3 billion euros, almost double last year's level of 725 million euros.

"The focus of DaimlerChrysler's second-quarter earnings will likely remain the Chrysler division, where we continue to believe earnings will significantly surpass market expectations," said JP Morgan auto analysts in a note.

Market expectations are rising that DaimlerChrysler, which has acknowledged that its current group outlook is on the cautious side, may raise its full-year earnings forecast on the back of Chrysler's recovery.

Amid uncertain market conditions, DaimlerChrysler in February warned it would post an operating profit for 2002 of more than 2.6 billion euros -- well below a forecast of 5.5-6.5 billion given a year earlier.

Since then the group has hinted that Chrysler, which has been forced to lay off workers and slash costs in a bid to reverse crippling losses in the last eighteen months, may beat its target of breakeven for 2002 and post a profit.

CLOUDY LONG-TERM OUTLOOK

But analysts warn that better results for Chrysler in 2002 do not necessarily make for a good 2003 and argue the positive trend may wane in the longer term.

"There could be signals which may look relatively positive but need to be treated with caution," said Merrill Lynch auto analyst Stephen Reitman.

Chrysler, whose troubles exposed the weakness of the 1998 merger between Daimler-Benz and Chrysler, is banking on a product-led recovery for the long term.

"We remain highly sceptical on this front," said UBS Warburg analysts who last week raised their earnings estimates for the company and raised the stock to "hold" from "reduce".

Analysts at the bank argue that pricing pressure, especially from GM, combined with strong competition from Japanese carmakers, will continue to take a toll on Chrysler.

DaimlerChrysler shares have fallen four percent since the start of the year, roughly in line with the Dow Jones European Auto Stoxx Index (Zurich:^SXAP - News). They have dived about 17 percent since late May after touching a high of 55.44 euros.

DaimlerChrysler's trucks division is also under scrutiny as its U.S. Freightliner unit strives to return to profit this year.

The company has said Freightliner is on track with its restructuring, and ahead of schedule on the cost-cutting side.

However, the company acknowledges it is difficult to predict how business will develop in the second half as new engine emissions rules that come into effect in the U.S. in the autumn may have brought forward demand.

Earnings at the luxury Mercedes unit, which have supported the group as Chrysler and commercial vehicles performances weakened, will benefit from the new large E-Class in Europe, but analysts expect a further improvement in margins later in the year after the model is launched in the U.S.

The group's results are due around 1100 GMT on Thursday.