> VW on track to hit goals after strong third quarter

Volkswagen posted forecast-beating underlying profit growth in the third quarter thanks to a strong performance at its VW brand, where it slashed jobs and costs.

Less than 24 hours after French carmaker PSA/Peugeot-Citroen warned on earnings, VW today stuck to its forecast for a full-year rise in group operating profit excluding one-offs and for a net cash flow at its core automotive business.

The group's operating profit increased to $1.25 billion (991 million euros), excluding $849.0 million (668 million euros) in one-off charges to top up its pension fund as well as reduce excess staff at its loss-making six western German plants.

"Although we have made significant progress in improving our competitiveness, we are still not satisfied with what we have achieved," CFO Hans Dieter Poetsch said.

"This is the year in which we set the course for the future and the long-term success of our company. Our goal is clear: We want to generate profit before tax of 5.1 billion euros in 2008," he added in a statement.

On a divisional basis the VW Brand Group before one-offs swung to an operating profit of 4445.0 million (350 million euros) from a loss of 54 million euros in the third quarter last year, while the Audi Brand Group increased profits by 46 percent to $555.6 million (437 million euros).

Poetsch told a conference call the group expected cost savings in the "hundreds of millions" thanks to a recent wage deal that improved flexibility in its six traditional VW plants.

High expectations for a restructuring success have priced shares in Volkswagen at a premium to its peers. The stock trades at 13.6 times next year's estimated earnings, according to Reuters Estimates. This compares to 13.0 times 2007 earnings for DaimlerChrysler and 8.1 times at Renault.

"Left and right look at what you see. Peugeot issues a profit warning, at Opel vehicle sales are again poor. This is not an industry with above-average growth," said Henning Gebhardt, head of German equities at retail investment fund firm DWS.

"Carmakers only then post reasonable profitability when they roll out new models onto the market," he continued.

Struggling to fully use their production capacity as demand remains sluggish, mass-market carmakers in both Europe and the United States have watched profit margins erode as high labor costs weigh and Asian competitors aggressively woo buyers.

Among the top five carmakers by volume, only Toyota Motor Corp. is celebrating unmitigated success in the mass-market business thanks to its reputation for high quality, an attractive mix of fuel-efficient cars and a soft yen.

"Carmakers have to react quickly to changing market conditions to avoid being a follower and they need to get control of costs and complexity," DWS's Gebhardt said.

UNSPECTACULAR RESULTS

Poetsch said VW had increased its stake in German truck maker MAN to around 20 percent from the 15.1 percent last reported. It filed plans with the German cartel office to raise its stake to more than 25 percent, sending VW stock lower.

Volkswagen wants MAN and Sweden's Scania, in which VW holds 34 percent of its voting rights, to merge in a deal that would create the European truck market leader.

"We would like to see a situation where -- on a basis that is advantageous for all sides involved -- the maximum of synergies could be produced between the companies. Therefore we remain on a realistic though optimistic side," Poetsch said.

After earning an average of $1.27 billion (1 billion euros) in operating profit per quarter, VW now needs to add only another $157.8 million (124 million euros) in the final three months of this year to reach its 2006 goal.

Volkswagen said third quarter revenue rose 7.1 percent to $31.93 million (25.1 billion euros) in line with delivery growth as it pushed new models such as the VW Eos, Passat and Jetta cars.

Earnings before tax, which include the non-consolidated results of the group's two key Chinese joint ventures, fell by half to $236.6 million (186 million euros).

After tax, earnings plunged to $29.3 million (23 million euros).

"Restructuring is well on track. This was an unspectacular good quarter," said Patrick Juchemich, analyst at Sal. Oppenheim.