FRANKFURT (Reuters) -- BMW posted a smaller than expected drop in second-quarter pre-tax profit on Thursday, cushioned by currency and interest rate hedging, though revenue skidded lower.
The Munich company said pre-tax profit fell seven percent to 947 million euros ($1.08 billion), while net income fell 9.7 percent to 568 million euros, both well above analyst expectations and the company's most recent guidance.
But sliding demand for its core luxury brand, particularly the 5-series saloon which is currently being replaced, and the effect of a strong euro hit revenue, which fell a sharper-than-expected 12 percent.
Shares in BMW, whose market capitalization exceeds that of the world's two leading carmakers Ford Motor Co. and General Motors, were down 2.5 percent by 1108 GMT, underperforming its sector and a broadly weaker German stock market.
"The numbers came in higher than we were expecting," said Merrill Lynch analyst Stephen Reitman, who rates the stock "buy". "Clearly they have taken a hit on currency, but despite the high spending the numbers look very solid."
BMW shares have outperformed those of its European peers by more than 10 percent since it said in March it was aiming for steady profit this year despite the heavy cost of its biggest ever new product program.
The company had been expected to post a 17-percent drop in pre-tax earnings to 848 million euros in the three months to the end of June from 1.02 billion a year earlier, according to the average forecast of 25 analysts surveyed in a Reuters poll.
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BMW said the pre-tax result was partly boosted by derivatives used to protect against interest rate and currency moves. Excluding those effects, pre-tax profit fell 18 percent to 875 million euros from 1.06 billion a year ago.
"These effects should not be extrapolated to the full year," BMW finance chief Stefan Krause told a conference call.
Chief Executive Helmut Panke said the company's target of flat profit this year included a possible five to ten percent deviation either way, but said he was still striving to match last year's performance, when BMW made 3.3 billion euros before tax.
The company -- which also owns the Mini and Rolls-Royce brands -- is banking on the new 5-series to boost sales in the second half of the year and help it sell more than the 1.057 million vehicles it sold in 2002.
Analysts welcomed the reiteration of the targets, noting that BMW traditionally errs on the side of caution with its guidance.
"The unchanged outlook should relieve a nervous market in our view," Morgan Stanley analysts said in a research note, adding that the strong second quarter could help nudge up market expectations for the full year.
The consensus estimate for BMW's full-year pre-tax profit is 3.32 billion euros, according to Reuters data.
Though luxury car makers tend to be more insulated from downturns than their mass-market peers, BMW's rival Audi, a unit of Volkswagen, said this week its first-half profit slipped more than 10 percent and the weak economy would make it difficult to be as profitable this year as it was in the past.
Arch-rival Mercedes, owned by DaimlerChrysler, saw operating profit inch higher in the second quarter to 861 million euros and, like BMW, expects flat profit this year.
Analysts applauded the performance of BMW's core automobiles business, which saw an eight-percent return on sales despite a 19-percent increase in research and development costs as it launches more models than ever before.
Revenue dropped 11.7 percent to 10.24 billion euros. It delivered 5.5 percent fewer BMW-badged cars to customers in the first six months than in the same period a year earlier, mainly due to weaker demand for the outgoing 5-series.