July 23 (Bloomberg) -- Volkswagen AG, PSA Peugeot Citroen and Fiat SpA reported earnings that beat analysts' estimates and forecast higher revenue as record fuel costs spurred sales of the Golf, Peugeot 308 and Fiat 500 compact models.

Peugeot rose the most in more than five years in Paris trading and VW jumped 6.9 percent in Frankfurt. Volkswagen's net income surged 35 percent, beating the 5.7 percent predicted by analysts, and Peugeot said first-half operating profit rose to 3.6 percent of sales, ahead of a full-year target. Fiat advanced 14 percent in Milan, the most in at least 23 years, on a 27 percent jump in sales in Brazil.

``Peugeot and maybe Volkswagen will buck a downward profit trend in 2008,'' said Howard Wheeldon, senior strategist at London-based BGC Partners LP. ``The European carmakers that suffer most'' will be the manufacturers with less trade outside western Europe and the U.S., he added.

Peugeot's sales jumped 1.6 percent to 31.3 billion euros ($49.3 billion) on demand for small cars including the 207 model. Volkswagen introduced an upgraded Audi A4 and a coupe version of the Passat, helping boost sales 4.5 percent in the second quarter to 29.5 billion euros as its Golf remained the company's bestseller. VW expanded in China with the Lavida and New Bora models.

Workforce Reductions

Volkswagen and Peugeot, the largest European carmakers, have fired workers in the western part of the continent to restrain costs. VW is also trying to cut more parts out of each piece of steel. Automakers are squeezed by an overall slump, brought on by soaring oil prices and higher costs for raw materials including steel, up about 60 percent this year. European car sales fell 7.9 percent in June as consumer confidence sank to a three-year low.

``The overall message is that despite cost increases, European carmakers are able to compensate with higher industrial efficiencies,'' said Renato Gargiulo, a Milan-based analyst at Centrobanca.

Turin-based Fiat, Italy's largest manufacturer, will close four of six plants in Italy for three weeks and Renault SA, the French No. 2, is reducing output of the Laguna hatchback. In the U.S., General Motors Corp. plans to cut jobs and sell assets after scrapping its dividend for the first time in 22 years.

Rosy Outlook

``The VW numbers have once again refuted the predominant end-of-the-world mood,'' said Juergen Meyer, who helps oversee 1.2 billion euros, including carmakers' shares, at SEB Asset Management in Frankfurt.

Volkswagen's models helped it fill factories that were once operating at less than 80 percent capacity, lowering costs and improving profits, said Christian Aust, a Munich-based analyst with Unicredit. ``The new models are well-received.''

Wolfsburg, Germany-based VW reiterated that full-year operating profit will beat last year's 6.15 billion euros.

``Volkswagen's successful model rollout, leaner processes and disciplined cost management are enabling us to grow profitably,'' Chief Financial Officer Dieter Poetsch said in a statement.

VW's stock rose 13.53 euros to 209.55 euros in Frankfurt. Volkswagen has advanced 34 percent this year, buoyed by a takeover approach from Porsche SE. The Bloomberg Europe Auto Manufacturers Index has fallen 14 percent.

Peugeot Targets

Peugeot Chief Executive Officer Christian Streiff, who cut 10,000 jobs in western Europe in the past year, told analysts he plans to continue to slash production costs and overhead. ``We're not at the end of this line.''

Speaking in his first public appearance since being admitted to a hospital on May 22 with a health problem, the 53-year-old Streiff said he's recovering from a ``cerebral incident.''

Peugeot shares advanced 9.2 percent, the greatest gain since Oct. 11, 2002, paring the stock's decline this year to 33 percent.

The French carmaker's first-half profit rose 49 percent to 733 million euros. Under Streiff's ``Cap 2010'' plan, Peugeot is chasing a 6 percent operating margin for 2010.

``It's encouraging that they reconfirmed their guidance,'' said London-based Nomura Securities analyst Michael Tyndall, who has a ``neutral'' rating on the shares.

VW plans to build a plant in Tennessee, manufacturing in the U.S. for the first time since 1988 as it seeks to end five years of losses in the largest car market. Volkswagen opened a plant in Russia in November to tap the oil-rich economy.

Volkswagen Goals

Chief Executive Officer Martin Winterkorn predicts that the new version of the Golf, which hits showrooms in October, will have a net profit margin of 5-7 percent from the outset, with costs kept down by sharing parts.

The German automaker plans to introduce 12 models over the next three years, including a sedan developed specifically for the U.S., to boost global sales to 8 million vehicles from 6.19 million in 2007. VW is seeking to catch Toyota Motor Corp., the world's No. 2 automaker.

Fiat sold fewer cars in Italy even as its 500 mini, a reissue of a 1950s classic, helped boost deliveries 62 percent in France and 30 percent in Germany.

Carmaker profit gains will be difficult to repeat because they're based on cost cuts, said Stephen Pope, Cantor Fitzgerald's chief global strategist in London.

`More Difficult'

``The second half is really the more difficult for carmakers to find sales,'' he said. ``None of them have pricing power, and they're in no position to dictate prices to steelmakers.''

Detlef Wittig, VW head of sales, said a new Scirocco sports hatchback and the latest Golf will fuel stronger second-half growth. The company predicts slowing demand in China, with market growth of 10-12 percent for the year, compared with a 20 percent advance in the first quarter.

Consumers are switching to smaller cars with more fuel- efficient engines, Wittig said. ``We see this trend not only in the U.S., but in Europe.''

Winterkorn, 61, said VW has the right strategy. ``The operating environment has become tougher and is demanding considerable efforts from the automotive industry,'' he said. ``We are well-positioned.''

Tax incentives in some countries are boosting small-car sales. An 8.3 percent increase in registrations of the Mini helped Bayerische Motoren Werke AG, the world's largest maker of luxury cars, increase European deliveries 1.7 percent in June.

Fiat, led by CEO Sergio Marchionne, 56, beat analysts' expectations with a second-quarter profit gain of 1.9 percent to 604 million euros.

``The market was prepared for the worst; every bit of positive news triggers a rebound,'' said Patrizio Pazzaglia, who overseas $400 million at Bank Insinger de Beaufort NV in Rome.

The tide may turn. Peugeot, for example, predicted a ``more difficult second half'' for Europe's auto market.

``Peugeot may have dodged a bullet this time, but I don't see them doing it again,'' Cantor's Pope said.

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

Last Updated: July 23, 2008 12:29 EDT