(Releads with targets, put option on auto unit, adds analyst, trader comments, updates shares)
By Jane Barrett
BALOCCO, Italy, July 26 (Reuters) - Italy's Fiat clawed its way to second-quarter operating profit on Monday but said it would miss some future targets in an "overly optimistic" turnaround plan drawn up by the group's former management.
Investors, however, focused on bullish comments by its CEO on Fiat's option to sell its loss-making auto unit to General Motors , boosting the shares by over two percent. GM owns 10 percent of the unit and is Fiat's industrial partner.
"I know nothing today to suggest the put is not going to be exercisable in January 2005," Sergio Marchionne told analysts after earlier saying he saw no benefit in renewing a standstill agreement which had pushed back the option's validity.
GM bought 20 percent of Fiat Auto in 2000 but that was diluted to 10 percent in a capital increase last year. Under the 2000 deal, Fiat has the right to sell its remaining stake in the car unit to GM but GM argues the option is no longer valid after asset sales Fiat made in the midst of a crisis.
The two groups hope to resolve the spat by December.
Fiat stock was up 2.36 percent at 6.47 euros at 1419 GMT, outperforming the DJ Stoxx Auto index , up 0.06 percent.
"The share is benefitting from the statements that the GM put option is still valid and will be exercisable from January 2005," one trader said.
Fiat's core car unit, which dragged the 105-year-old company into its worst crisis in 2002, posted a worst than expected second-quarter loss due to still sluggish sales and a strike.
Fiat said the car unit would only become profitable at an operating level in 2006, pushing back a previous target to break even in 2005. Marchionne said the plan, drawn up by previous management, was "crafted without assessing competitive response".
AUTO WOES
Analysts said the auto division remained Fiat's headache.
"Fiat's operational trend remains hampered by performance at the core Auto division, with little impact from new models and ongoing negative cash flow at the group level," Morgan Stanley said in an initial reaction to the results.
Italy's largest private sector employer also pushed back a target for the group as a whole to break into the black on a net basis next year, adding it saw net profit totalling more than 500 million euros in 2006 and at least 1.4 billion euros in 2007.
In the second-quarter, Fiat said it made a group operating profit of 18 million euros ($22 million), slightly higher than the 12 million euros median forecast in a Reuters poll of 11 analysts last week and a loss of 25 million a year ago.
But Fiat Auto continued to struggle and posted a loss of 282 million euros, worse than the 180 million expected by analysts. It lost 234 million euros in the year-ago period.
"They aren't great quarterly results and some numbers came in worse than expected," one trader said. "But they have started to clean up the balance sheet and have reiterated the 2004 breakeven target yet again. The market expected a nastier surprise.". Fiat said it was still confident it would break even at operating level in 2004.
Fiat said it would keep to the former plan to cut costs and improve margins and hoped that new models across its bulldozer to bus range will help foster growth in the second half.
However, despite launching four new cars recently, Fiat Auto's revenues rose only 2.6 percent year-on-year in the second quarter while in unit sales they were only 2 percent higher.
Fiat put some of that down to a three-week strike at the Melfi plant which brought most of its Italian factories to a halt in April and lost production of about 40,000 cars.