July 29 (Bloomberg) -- PSA Peugeot Citroen, Europe’s second-largest carmaker, reported a first-half loss and surprised investors by saying it generated cash after slashing production and reducing inventory amid the global auto slump.

The net loss was 962 million euros ($1.36 billion), or 4.24 euros a share, compared with a 733 million-euro profit, or 3.21 euros, a year earlier, Paris-based Peugeot said today in a statement. Free cash flow reached 467 million euros as Peugeot drew down unsold vehicle stocks by 31 percent.

“Peugeot’s surprisingly strong cash performance will ease fears over a rights issue,” David Arnold, an analyst at Credit Suisse in London who has an “outperform” rating on the stock, said in a telephone interview.

Peugeot rose as much as 7.4 percent in Paris trading. The carmaker and some of its European rivals have closed plants temporarily as they struggled to reverse a buildup of unsold cars. Chief Executive Officer Philippe Varin, who took over from Christian Streiff in March, is pressing ahead with measures to shorten vehicle development times and trim costs while seeking new partnerships and alliances to expand into emerging markets.

Revenue fell 22 percent to 23.5 billion euros, the company said. The operating loss was 826 million euros, excluding one- time gains and losses, compared with a profit of 1.12 billion euros a year earlier. Peugeot predicted a 2009 operating loss of 1 billion euros to 2 billion euros and said it still expects negative cash flow for the full year.

‘Adverse Conditions’

The results “reflect the impact of adverse conditions in the European markets, which were only partially mitigated by the benefits from performance action plans and new model launches,” Varin said in the statement.

In the first half, Peugeot had one-time charges totaling 506 million euros, including 294 million euros in reorganization costs as the carmaker extends a program of voluntary departures until March 2010.

Analysts had expected a 971.5 million-euro net loss on sales of 24.1 billion euros, according to the median of estimates compiled by Bloomberg.

Peugeot added as much as 1.36 euros to 19.77 euros for its steepest intraday jump in two months, and traded at 19.62 euros as of 9:24 a.m. Before today, the stock had jumped 52 percent this year, valuing the automaker at 4.3 billion euros. The Bloomberg Europe Autos Index gained 11 percent in the period.

While Europe pulled out of a 14-month slide in new-car registrations in June, help by billions in government-backed sales incentives, first-half volumes were 11 percent lower, according to the European Automobile Manufacturers’ Association.

Peugeot said it reduced its inventory to 431,000 unsold vehicles as of June 30, from 628,000 cars at the end of 2008.

Production Cut

“To achieve this, production was cut by 32 percent in the first half and by nearly 50 percent in the first quarter,” Chief Financial Officer Frederic de Saint-Geours told analysts at a briefing in Paris.

Global car and light-truck sales plunged 14 percent to 1.59 million vehicles in the first six months, Peugeot said earlier this month.

“PSA’s long-term challenges to improve its business remain, and current profits remain depressed,” Adam Jonas, an analyst at Morgan Stanley in London who recommends buying the shares, wrote in an e-mailed report. “But financial distress is evaporating rapidly.”

The French carmaker said yesterday it had shelved plans for a third factory in China, even as Varin seeks to reduce Peugeot’s dependence on Western Europe, which accounted for almost two-thirds of 2008 sales by volume.

Chinese deliveries fell 3.7 percent last year to 188,000 vehicles, or about 40 percent of Peugeot’s local production capacity, even as the market grew 9 percent.

To contact the reporter on this story: Laurence Frost in Paris at lfrost4@bloomberg.net

Last Updated: July 29, 2009 03:25 EDT