FRANKFURT (Reuters) -- New models and strong sales in China helped BMW AG to beat second-quarter profit forecasts and keep it on track to remain the world's biggest luxury carmaker under the challenge of its German rivals.
Sales by the core BMW brand rose 8.3 percent to 458,000 vehicles, a record high, as new models such as the 4-series coupe and 2-series compact helped the group to tap stronger demand in China and Europe.
Earnings before interest and tax (EBIT) jumped 26 percent to 2.6 billion euros ($3.5 billion), the company said on Tuesday, topping a forecast of 2.23 billion in a Reuters poll of analysts.
"This is a major beat and we remain convinced that the street is underestimating BMW's medium- and long-term earnings power," London-based ISI Group analysts said in a note.
BMW shares were 2.8 percent higher at 1005 GMT, outpacing a 0.6 percent gain by Germany's blue-chip DAX index.
Luxury carmakers weathered a six-year sales slump in Europe thanks in part to strong demand from emerging markets. But signs of a slowdown in some of those countries and a still fragile recovery in Europe has raised concerns about future demand.
BMW also faces strong competition from arch rivals Audi, part of the Volkswagen group and Mercedes-Benz, owned by Daimler.
BMW cautioned on Tuesday that the crisis in Russia was starting to make itself felt. After showing little change in the first six months, regional sales fell more than 11 percent in July, Chief Executive Norbert Reithofer said.
BMW's quarterly automotive EBIT 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 Audi, as well as its own 8-10 percent target range.
Investments in new models and technology to cut carbon dioxide emissions will see automotive profitability eroded in the rest of the year while remaining within the target range, Chief Financial Officer Friedrich Eichiner said.
BMW has quietly repositioned some of its best-selling models upmarket. The coupe and convertible version of its 3-series have been discontinued and replaced with vehicles badged as a 4-series, commanding higher list prices.
BMW has also expanded and renewed its range of luxury offroaders. Sales of the new X5, which hit showrooms in late 2013, rose 29.7 percent in the first half, the company said.
The sale of more luxury offroaders will help offset lower profits from BMW's growing range of smaller cars such as the 2-series Active Tourer and new versions of the Mini.
The proportion of smaller, lower-margin cars will rise to more than 40 percent of the group's overall vehicle sales from 25-30 percent currently, CEO Reithofer said.
In response, BMW is reining in development costs by cooperating with rivals. The group will continue pooling some component purchasing with Daimler, and a decision on whether to build a sportscar with Toyota is expected to be made this year, Reithofer added.
Munich-based BMW is targeting a significant sales increase to 2 million vehicles or more this year, after delivering a record 1.96 million Mini, Rolls Royce and BMW cars in 2013.
The company also reiterated its goal to raise pretax profit by up to 10 percent.
Last year, BMW led the global premium race with 1.65 million cars sold by the namesake brand, topping Audi's 1.57 million and third-placed Mercedes with 1.47 million.
($1 = 0.7450 Euros) (Editing by Laurence Frost and Mark Potter)