(Adds company comments, detail, updates shares)
By Madeline Chambers and Noah Barkin
PARIS, July 24 (Reuters) - Europe's second-largest carmaker PSA Peugeot-Citroen on Wednesday beat market forecasts with its first-half results and nudged up this year's margin target for its autos division.
The company, one of the few bright spots in the European auto sector this year, said its first-half net profit slipped 4.1 percent to 985 million euros, comfortably above a consensus forecast from a Reuters poll of analysts of 892 million euros.
PSA, which until now has been calling for an operating margin in its autos division of 4.8 to 5.0 percent in 2002, also said it was now officially targeting the top end of that range.
"Taking into consideration the results of the first half, we are now targeting an operating margin in the auto division of five percent and overall operating profit of 2.9 billion euros," the company said in a statement.
It also reiterated its objective of selling 3.25 million vehicles this year.
Under its Chairman Jean-Martin Folz, the French automaker has discovered an unexpected flair for design which has drivers paying premium prices for flashy new models like the sleek Peugeot 307 and bubble-shaped Citroen C3.
At 1209 GMT, PSA shares were up 2.67 percent at 42.30 euros, outperforming the DJ European Auto Stoxx Index , which was down 3.1 percent.
PSA shares were the top performer on the blue chip French CAC-40 index in 2001, rising 18.3 percent. They have retreated 14 percent this year, in line with the European sector.
"These results are very encouraging," said Adam Collins, autos analyst at Schroder Salomon Smith Barney, who has an "outperform" rating on the stock.
"We are encouraged by cash flow developments, and they are saying they can achieve the higher end of their previous guidance, despite market conditions that are worse than previously expected."
OUTPERFORMER
PSA has withstood weak demand for new cars in its main market of western Europe so far this year, even gaining market share, helped by a pipeline of popular new vehicles.
The question now is how long PSA's good fortune will last, especially once its product range looks less fresh.
PSA has gained mainly at the expense of competitors with ageing product line-ups, such as Europe's biggest carmaker Volkswagen and domestic rival Renault .
"Peugeot has gained from a hiatus in Renault's product range which has aged considerably," said Merrill Lynch auto analyst Stephen Reitman.
"That has created a window for Peugeot which it has exploited. But now we are moving into the (Renault) Megane phase, with its ambitious targets, and this will increase the degree of competition."
Renault's new Megane, unveiled earlier this month, will compete in the key compact segment, accounting for over one third of European car sales. VW launches its new Golf in 2003.
PSA also said operating profit rose 8.7 percent to 1.524 billion euros in the first six months of the year on sales of 27.37 billion.
The company has suffered from tough conditions in some difficult markets, including Argentina and Brazil.
Analysts also greeted Tuesday's news that PSA and German luxury carmaker BMW AG will jointly develop and build a new family of petrol engines for small cars.
"It is a good agreement and both companies will be able to exploit economies of scale," said Reitman.
He said Peugeot stood to gain from BMW's expertise in engines and there would be significant cost savings for the Munich-based group. He also said the deal underlined the very strong independent stance of both companies.
PSA and BMW tend to team up with partners on individual projects rather than taking equity stakes in other companies.
"The BMW deal illustrates once more our policy to strike strategic partnerships in areas where it is necessary to have a critical size -- that's all," Folz told reporters. (Additional reporting by Benoit Van Overstraeten in Paris)