BAYERISCHE MOTOREN WERKE 
FRANKFURT (Reuters) - Daimler AG (>> Daimler AG) lifted sales and profits at its core Mercedes-Benz luxury car division in the third quarter, showing how the group is narrowing the gap with rivals Audi and BMW.
The results are a sign that the Stuttgart-based company's efforts to regain the top spot in luxury cars are beginning to have an impact but analysts question whether Daimler has enough momentum to catch peers, whose profit margins have surged ahead.
Mercedes-Benz Car's return on sales from ongoing business rose to 8.6 percent in the third quarter from 7.6 percent, its highest level for this measure of profitability in more than three years. This performance helped to boost group operating profit (EBIT) by 67 percent.
Daimler said on Thursday it still expected a significant rise in group core profit for 2014 and that sales of Mercedes-Benz and smart branded vehicles would rise above 1.6 million vehicles from 1.57 million last year, despite cutting its expectations for worldwide passenger car demand.
It said it expected global passenger car sales to grow by just 3 percent this year, down from an earlier forecast of 4-5 percent, as the Ukraine-Russia crisis and slower growth in Brazil and Argentina would dampen demand.
Shares in Daimler slid 0.3 percent to 59.60 euros by 0944 GMT, underperforming a 0.6 percent rise in the German blue-chip DAX <.GDAXI>.
Juergen Pieper, automotive analyst at Metzler bank, said Mercedes cars margins were not yet satisfactory.
"I think Daimler has peaked. The margin in the cars division is really good for Mercedes standards, but it is not where it should be for a leading premium manufacturer."
Pieper also said he was concerned about the company's exposure to the trucks market, which is heavily dependent on shaky emerging markets.
Daimler Trucks sales slumped in Latin America and were weak in western Europe and Asia. They rose 1 percent overall thanks to a 25 percent jump from the countries belonging to the North American Free Trade Agreement.
Core profit (EBIT) at the trucks business rose 17 percent, in part thanks to cost-cutting.
On a group level, Daimler's core profit (EBIT) was 3.73 billion euros ($4.72 billion), including a 1.01 billion-euro gain from the sale of a 50 percent stake in Rolls-Royce Power Systems.
Core earnings from the ongoing business rose 21 percent to 2.79 billion euros, helped by strong sales of Mercedes-Benz Cars that bucked a trend of slowing demand for passenger cars, and steady sales of trucks.
LAGGING PEERS
Commerzbank auto analyst Daniel Schwarz said: "Earnings quality was good and Daimler has not reached the peak of its product cycle yet, so there is no reason why they can't also earn as much as peers."
The company unveiled a new S-Class flagship limousine in July 2013 and its compact models, which include the GLA offroader and the B-Class, have been recently launched or overhauled.
Earnings momentum is expected to continue as a new generation of its C-Class sedan, the company's best selling model which accounts for about 30 percent of sales, went into production in China, the world's largest car market, in July.
In previous quarters, the return on sales margin at Mercedes has lagged that of its German premium rivals.
In the second quarter, BMW's (>> Bayerische Motoren Werke AG) automotive margin, the best profitability gauge for peer comparison, came in at 11.7 percent, exceeding the 7.9 percent achieved by Mercedes-Benz and 9.9 percent by Volkswagen's Audi (>> Volkswagen AG)[NSUG.DE].
The last time Mercedes held the title of top selling premium auto maker was in 2004. Last year, BMW led the pack with 1.65 million vehicles sold worldwide. Audi was next at 1.57 million and Daimler in third place, with 1.47 million Mercedes-Benz branded cars sold.
Daimler is investing in modernising its production facilities in its attempt to reclaim the crown of largest premium carmaker by sales from BMW.
In total, the company will spend 22 billion euros on plants, equipment and research and development in 2014 to 2015, Chief Financial Officer Bodo Uebber told journalists.
Daimler will focus on strengthening its core business rather than making large acquisitions, despite a recent windfall from the sale of a 4 percent stake in Tesla, Uebber said, declining to elaborate on whether this precluded smaller acquisitions such as taking a stake in motorbike maker MV Agusta.
Daimler is the first of the German premium auto makers to release third-quarter results, which included the group's best-ever month for sales of Mercedes-Benz cars in September, benefiting from new models and growing demand in China.
Volkswagen is due to report on Oct. 30 and BMW on Nov. 4.
(1 US dollar = 0.7908 euro)
(Additional reporting by Ilona Wissenbach; Editing by Georgina Prodhan and Jane Merriman)
By Edward Taylor and Andreas Cremer
