(Adds details from news conference, analyst, updates shares)
By Rebecca Harrison
PARIS, July 27 (Reuters) - French carmakerPeugeot Citroen's profits by fell less than expected in the first half despite a dowdy model line-up, and it cheered investors on Tuesday with hints of a brighter full-year outlook.
Europe's second biggest carmaker said in a statement net profit totalled 681 million euros ($828.3 million) compared with 869 million in the year-ago period, and ahead of a Reuters consensus forecast of 624 million euros.
said new model launches, such as the Peugeot 1007 city car and Citroen C4, should make for a brighter second half, and repeated its full-year target for a flat group operating profit margin of around four percent and an increase in unit sales.
However Chairman Jean-Martin Folz said he hoped "positive trends" such as a recovering western European market would continue over the next few months and that PSA would decide in October whether or not its targets were overly cautious.
The comments powered PSA shares up more than five percent to 45.65 euros by 1110 GMT, ahead of sector peers. The stock has outpaced the DJ Stoxx autos index so far this year but still trades at a cheaper valuation than many of its rivals.
"Given the positive earnings surprise, guidance is looking a bit conservative," said Adam Jonas, autos analyst at Morgan Stanley. "I reckon PSA will raise its full-year outlook, but is buying itself a bit of time to see how the market develops."
A former sector star, PSA fell from grace in 2003 when it posted its first profit fall since Folz took over at the wheel in 1998. A weak French market and strong euro compounded the effects of a patchy model line-up.
The company has dubbed 2004 "a year of transition", before a fully fledged revival in 2005, driven by an arsenal of new cars.
PROFIT OUTSIDE EUROPE?
PSA's operating profit was a better-than-expected 1.07 billion euros versus 1.28 billion and expectations of 973 million. Sales rose to 28.94 billion euros from 27.76 billion, thanks to a recovery in the second quarter and strong demand outside western Europe. Analysts had forecast sales of 28.09 billion.
That yielded a group operating margin of 3.7 percent versus 4.6 percent a year ago, as motorists snubbed its ageing cars for smarter and cheaper models from rivals such as domestic peer.
Some analysts had fretted that while growth outside western Europe was boosting turnover, margins on these sales might be slim. But one analyst said the better-than-expected figures appeared to allay those fears.
Folz declined to say whether the company had turned a profit overall outside western Europe, saying only its business in China and Latin America was in the red but that it was making money in markets such as eastern Europe and north Africa.
One potential cloud on the horizon was high raw materials prices, although Folz said long-term steel contracts cushioned the blow, adding the impact on PSA's operating profit for the full year would be around 80 million euros.
-- the current market darling -- is expected to post a jump in first-half profit on Wednesday, driven by the popularity of its angular new Megane family of cars. However PSA fared better than Germany's , which slashed its 2004 profit target after weak first-half earnings.
The company's net financial position improved to 1.08 billion euros from 563 million at the end of 2003, while free cash flow rose to 836 million euros from 435 million in the year-ago period.