Volkswagen Q2 profit beats expectations

UPDATED: 7/27/06 10:47 AM FRANKFURT -- Volkswagen AG increased second-quarter operating profit before special items by nearly half.

Excluding $1.15 billion (906 million euros) in one-off restructuring charges, operating profit came in at $1.64 billion (1.30 billion euros), VW said on Thursday, exceeding the median estimate of 1.03 billion euros from 20 analysts Reuters polled.

"At the start of the German earnings season, VW has given a positive signal for the market," a Frankfurt-based trader said.

Driven by a one-off disposal gain of $1.02 billion (803 million euros) from the sales of its Europcar rental agency, Volkswagen's net profit soared to $1.09 billion (859 million euros) from 333 million euros a year ago.

The Wolfsburg-based group reaffirmed its forecast for an unspecified gain in operating profit before special items and a positive industrial free cash flow for the full year. It also stuck to its mid-term pretax profit target of $6.50 billion (5.1 billion euros) in 2008.

Analysts had warned that VW's underlying earnings strength would be clouded by one-off effects from restructuring and the Europcar sale, as well as possibly more conservative accounting methods ahead of crucial negotiations with labor unions later this summer over deep restructuring cuts in Germany.

Morgan Stanley wrote in a note that VW was making strides in ensuring the credibility of its 2008 operating targets, adding that VW's operating margin had "smashed" its own estimate.

Underscoring that its long-troubled core VW brand is slowly turning the corner, the group said VW Brand Group's second-quarter operating profit before special items easily overtook that of its Audi Brand Group sister division, long the biggest contributor to group earnings.

Industrial free cash flow, often seen as a reliable indicator for earnings quality, nearly tripled to $4.41 billion (3.46 billion euros). While a sizeable chunk came from the Europcar sale, the company also continued to optimize its working capital.

"VW stock is already discounting much good news, however, and is significantly above its historical median valuation," Sanford Bernstein analyst Stephen Cheetham said in a research note, citing a share price trading 12 times earnings versus the median 10.5 multiple over the past five years.

When Volkswagen posted a $1.27 billion (1 billion euros) rise in "other provisions" in the first quarter that management did not entirely explain, some analysts speculated that VW might be understating profit to gain leverage over unions in its fight to reinstate a 35-hour work week with no extra compensation.

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