(Adds fund manager comment paras 13-14, 21-22, updates shares)
By Michael Steen
FRANKFURT, July 30 (Reuters) - 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).
Shares in the firm climbed strongly on the announcement and by 1224 GMT, the stock was up three percent at 46 euros, leading gainers on the DAX and outperforming the pan-European DJ Stoxx auto index , which was 0.7 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."
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, down 12 percent so far this year. Only Italy's Fiat has dropped further in the European sector.
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 pre-tax profit 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, one percent down at 22.764 billion euros, also came in above expectations. 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.
"In spite of the tough conditions in their home market and the unfavourable point in their product cycle, they seem to have managed matters on the cost side," said Trudbert Merkel, who manages four billion euros of German shares for Deka.
"Really this is a very convincing result," he said, adding he would buy more VW stock.
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. "Once it has launched its new models, the Golf and Passat, VW will become much stronger, like Peugeot in the late 1990s."
Pischetsrieder is seeking to re-align the company's brands -- which include SEAT, Skoda, Audi, Lamborghini and Bentley -- to stop them from competing against each other.
Deka's Merkel said Pischetsrieder, who took over the helm earlier this year, could make up for lost ground in VW's communications with investors.
"He has also attacked organisational problems, such as by bringing the diversity of brands under two roofs to better coordinate products and target more niches," Merkel said.
Pischetsrieder 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. (Additional reporting by Madeline Chambers and Marius Bosch)