(Edits throughout, adds targets, shares, quotes)
By Rebecca Harrison
PARIS, April 23 (Reuters) - Europe's largest listed car parts maker Valeo posted a forecast-lagging 10 percent rise in first-quarter net profit on Wednesday, but its shares edged higher as investors cheered brighter profit margins.
Valeo said in a statement that net profit in the first three months climbed to 22 million euros from 20 million previously, well below a consensus forecast for 37 million euros due to charges linked to a slide in the value of its holding of its own shares and to restructuring costs.
But cost cutting also paid dividends, helping core profits resist a wobbly car market, which Chairman Thierry Morin forecast would slide 4-5 percent in Europe and 5-15 percent in the United States this year.
Morin reiterated that he aimed to keep lifting the firm's operating margin, a key measure of profitability, this year, despite industry gloom, and said he expected the sales trend to be in line with that of the market.
The Paris-based firm's operating profit rose to 109 million from 98 million, giving an operating margin of 4.5 percent, up from 3.8 percent in the prior-year period. The figure was just shy of a forecast for operating profit of 114 million euros.
"The net profit was a bit below expectations but linked to exceptional charges," said Thomas Besson, analyst at SSSB, who rates the stock "outperform, high risk".
"It was a fine improvement at other levels, given tough market conditions," he said.
Valeo stock, which has underperformed its sector by nearly 15 percent this year, gained 3.4 percent to 24.96 euros by 1007 GMT, just ahead of a buoyant CAC-40 index and DJ Stoxx European autos index . "The market is focused on improvement in the operating margin, which was hoped for, but not a given," said Patrice Solaro, autos analyst at Julius Baer.
TARGETS CONFIRMED
Morin, who has slashed costs and pulled the firm's troubled U.S. unit back from bankruptcy, confirmed he expected Valeo to improve its operating margin this year from last year's five percent.
But when asked if six percent was still a "good target", as he suggested earlier this year, Morin said this was not the firm's forecast.
Sales dipped four percent to 2.44 billion euros but edged up 1.5 percent at constant exchange rates, outpacing the market in Europe and Asia but not in North America.
Valeo reiterated that sales of its windscreen wipers, headlights, hi-tech parking gadgets and other car parts would be in line with the global car market this year, and said its order intake was 1.3 times sales, in line with its targets for the year.
"Our sales will be in line with the market," Morin told reporters. "We will continue to improve our operating profit margin thanks to...a reduced cost base and innovative technology."
Belt-tightening at Valeo means getting rid of excess capacity and slashing the number of suppliers.
The firm said it had shut eight of its 140 industrial sites in the first quarter as it reined in activity to match lower car production and said it had scrapped almost a fifth of its suppliers and would make further progress in coming months.
Morin said growth at the bottom-line level had been capped by an extra 4.3 million euros in financial charges, taken to allow for the fall in value of the one percent of Valeo's stock it owns itself.
The firm also took a 26 million euro one-off restructuring charge, which includes the cost of closing the eight sites.
Morin confirmed the firm's struggling Rochester unit in the U.S. would break even in 2004, and that the firm was on track to halve its losses there this year as targeted.
Valeo's rival Faurecia said earlier this month its sales had jumped eight percent in the first three months of 2003 and confirmed a goal to boost its operating margin quarter on quarter this year, despite a faltering car market.