(Reuters) - Volkswagen's third-quarter earnings jumped as profit margins at its main passenger-car division rose for the first time in almost two years, adding to record sales of luxury Audis and Porsches.
While sales at Audi and Porsche - which account for two-thirds of group profit - have been rising all year, they have been slowing at the carmaker's VW brand.
Profit margins have also languished at the division, which has high fixed costs and production issues related to a new modular manufacturing platform. To boost efficiency, VW in July announced a goal to cut costs by 5 billion euros per year from 2017.
However in the third quarter profitability at the VW brand - which accounts for half of group sales but less than a fifth of profit - increased for the first time since the final three months of 2012, buoyed by a weakening euro which boosted exports and a recovering European car market.
Together with robust demand for Audis and Porsches in Europe and China, this helped VW's third-quarter operating profit rise 16 percent to 3.23 billion euros ($4.07 billion). That beat the top-end forecast of 3.09 billion euros in a Reuters poll of analysts.
"The profitability gains at the core brand stand out of this very positive set of earnings," Frankfurt-based Commerzbank analyst Daniel Schwarz said of the margin rise to 2.8 percent from 2.6 percent a year ago. He has a "buy" rating on the stock.
European car sales, which make up 40 percent of VW's group deliveries, had their 13th straight monthly gain in September and VW will keep running extra shifts at its main plant in Wolfsburg to meet demand for the Golf and Tiguan SUV models.
VW's European rivals such as PSA Peugeot Citroen, Renault and Fiat Chrysler Automobiles (FCA) have also benefited from stronger demand as the region is bouncing back from a two-decade low reached in 2013.
Peugeot and Renault posted higher third-quarter revenue, prompting the French peers to raise their 2014 auto market sales volume forecast for Europe. FCA reported a lower-than-expected rise in quarterly operating profit, but managed to halve its losses in Europe on the back of slightly higher sales.
Analysts said VW was on course for record profit this year.
With the carmaker's nine-month return on sales of 6.4 percent hovering at the ceiling of VW's margin target range of 5.5-6.5 percent, full-year profit may come in at about 12.7 billion euros compared with last year's record 11.7 billion, said Arndt Ellinghorst, analyst at London-based ISI Group.
"VW will complete the year with a sound result after good quarterly numbers," said Ellinghorst who has a "hold" recommendation on the stock. "The question is how much earnings momentum will be left for 2015?"
Volkswagen's stock was up 1.9 percent at 165.15 euros at 1656 GMT, making it the second-biggest gainer on Germany's benchmark DAX index.
Still, with geopolitical uncertainties in Russia and weakening confidence in European economies, the German group stuck to its profit margin target and a forecast for revenue to move within a range of plus or minus 3 percent of last year's record 197 billion euros.
"We are satisfied with the first nine months and will also be satisfied with the full year," Chief Executive Martin Winterkorn said at a conference in Munich. "We are keeping to our targets because we think the (market) environment is still very volatile."
Third-quarter vehicle sales at Audi and Porsche, which account for two-thirds of VW group earnings before interest and tax (EBIT), were up 7.2 percent and 25 percent respectively to 429,250 and 47,800 cars.
VW has enjoyed a period of unprecedented growth, boosted by emerging market buyers of its upmarket Audis and Porsches. Its sales have risen by more than half to 9.7 million vehicles in 2013 compared with levels before the financial crisis.
Its third-quarter group deliveries were up 4.1 percent, at a record 2.43 million autos, with growth in China and Europe offsetting declines in the Americas, keeping it on course to hit a 10 million target in 2014 - four years early.
But the rapid expansion has led to a costly proliferation of models, especially at the core passenger-car brand where profit margins have languished as the top-selling Golf hatchback has expanded to 15 different models.
General Motors, VW's closest rival in the global sales race led by Toyota, reported third-quarter profit that beat analyst estimates due to rising demand for pickup trucks and sport-utility vehicles in North America.