VW waters down outlook after strong Q2

FRANKFURT, July 30 Michael Steen writing for Reuters reported that Volkswagen AG, Europe's biggest carmaker, posted stronger than expected second-quarter earnings on Tuesday but bowed to what many saw as the inevitable and cut its profit outlook for the whole year.

Hit by shrinking markets in Europe, the United States and South America and only able to offer an ageing range of models, VW had come under increasing pressure to concede weakness.

It chose to do so at the same time as unveiling first half-results which beat expectations. It said second-quarter pre-tax profits rose 13.5 percent compared to a year ago to 1.266 billion euros ($1.24 billion).

VW shares climbed strongly on the announcement and by 0924 GMT, the stock was up 3.6 percent at 46.25 euros, leading gainers on the DAX and oputperforming the pan-European DJ Eurostoxx auto index (Zurich:^SXAP - News), which was 0.08 percent down.

Volkswagen said it expected a pre-tax profit of "around four billion euros" for the full year, down from previous forecasts that it would match last year's record 4.4 billion euros.

"This is the first sign that VW management understands what equities investors want," said Lehman Brothers analyst Chris Will, who rates VW 'hold'.

"The long-term story at VW was good but the profit forecast for 2002 was at odds with what analysts expected and that created a short-term risk," he said. "This has a magnified impact on management credibility."

Volkswagen said in a statement: "Our previous results forecast for the full year was based on the premise that the economy would improve in the second half of the year in the United States and western Europe. This is not recognisably the case, especially in western Europe."

CHEAP SHARES?

The revised outlook means both Volkswagen and German-U.S. carmaker DaimlerChrysler, which builds luxury Mercedes-Benz cars as well as middle-market Chryslers, are expecting to make about the same pre-tax profit this year.

Daimler will require more than one-and-a-half times Volkwagen's revenues to do so, yet VW's shares are the worse performing. Only Italy's Fiat has dropped further on the DJ Stoxx European auto sector this year.

The company said it expected unit sales of just under five million vehicles in 2002, in line with comments from senior executives that it might not reach last year's five million.

The results for the three months ending June 30 beat market expectations. A Reuters poll of 22 analysts had predicted an eight percent slide in pre-tax profit to 1.028 billion euros.

Sales also beat expectations. VW said second-quarter sales were one percent lower than a year ago at 22.764 billion euros, versus analysts' forecasts of around 22.617 billion.

For the first half of the year VW said pre-tax profit was down 4.1 percent at 2.263 billion euros, while sales were down 3.2 percent at 44.060 billion euros.

Many analysts had been anticipating the group would reduce its guidance for the full year amid weak global auto markets.

TOUGH SECOND HALF

"If this is (a profit warning), we are not particularly worried because it is not severe," said analyst Xavier Gunner at UBS Warburg. "We knew that the second half of the year was always going to be difficult."

New Chief Executive Bernd Pischetsrieder had repeatedly said the firm would match last year's record profit, but the company faces a challenging period as some of its best-selling cars, such as the Golf, begin to show their age.

Rivals such as France's PSA Peugeot Citroen have newer cars on the market in a segment hit by slowing sales.

"Everyone knew with its ageing models 2002 was going to be a bad year," said Lehman's Will.

"But in the future there is upside. Once it has launched its new models, the Golf and Passat, VW will become much stronger, like Peugeot in the late 1990s."

"The question we are asking is about the second half," said industry analyst Patrick Juchemich at Sal. Oppenheim. "You have to look at risk in areas like South America."

Pischetsrieder is seeking to re-align the company's brands, which include SEAT, Skoda, and Audi, to stop them from competing against each other.

He must also contend with tough competition in shrinking markets. VW said its western European market share slipped to 18.2 percent from 18.9 percent in the first half.

Its share of imports in the United States dropped to 9.5 percent from 10.0, and Brazilian market share eroded to 27.1 percent from 29.0 percent.