DaimlerChrysler AG's (DCX) third-quarter operating profit rose 38 percent to 1.84 billion euros ($2.2 billion), easily beating analysts' forecasts, thanks to a surprisingly strong recovery at its flagship Mercedes Car Group.

Posting results a day earlier than expected, the world's fifth-biggest carmaker reiterated on Tuesday its forecast for slightly higher 2005 operating profit, excluding restructuring costs for its loss-making Smart small car brand.

Mercedes operating profit for the third quarter increased 43 percent to 436 million. Me.

"The better (Mercedes) profitability was due in particular to the new products and the efficiency-improving measures," Daimler said in a statement, adding the results showed the division had definitely turned the corner in the second quarter.

"The credibility of the turnaround story at Mercedes Car Group is growing with each quarter," said HVB analyst Georg Stuerzer, who rates DaimlerChrysler "outperform" with a 44-euro price target.

"Daimler's various divisions are finally firing on all cylinders, and that will be even more the case come 2006."

The stock was up 3 cents to $49.76 in U.S. trading late in the session there.

Traditional cash cow Mercedes has been grappling with the strong euro, model changeovers, spending to fix quality problems and hefty losses at Smart, which had pushed it to a rare operating loss in the first quarter of 2005.

The profit collapse prompted an efficiency drive that aims to boost earnings at the division by up to 3.5 billion euros and restore an operating margin of 7 percent by 2007.

Mercedes is cutting up to 8,500 of its 94,000 jobs in high-cost Germany over 12 months, a step that will cost it 950 million euros, most of which will booked in the fourth quarter.

U.S. arm Chrysler posted a 43 percent rise in operating profit to 310 million euros despite a fiercely competitive U.S. automotive market and 57 million euros in financial support it provided troubled supplier Collins & Aikman Corp (search).

The result was in line with market expectations.

"The positive effects (of increased car shipments) were partially offset by a slight negative net pricing," it added, noting restructuring charges had fallen as well.

While tough competition in the North American market should continue in the fourth quarter, Chrysler expects 2005 unit sales to rise, it said.

By comparison, U.S. rival General Motors Corp. (GM) lost $3.4 billion before taxes and special items at its automotive division in the third quarter while Ford Motor Co.'s (F) auto operations posted a pretax loss of $1.3 billion excluding special charges.

The group's market-leading commercial vehicles division tripled its operating profit to 498 million euros amid a global trucks boom that is showing signs of weakening in Europe. Recall costs at Japanese unit Fuso had hit the year-earlier quarter.

Daimler's group net profit fell 21 percent to 755 million euros due to one-time financial income booked in the third quarter of 2004. Revenue rose 9 percent to 38.2 billion euros.

"The quarterly results are very, very good," said Dresdner Kleinwort Wasserstein analyst Arndt Ellinghorst. "Profitability at Chrysler and Commercial Vehicles is convincing. This should take some of the fear out of the market. I think earnings estimates will now have to be raised."

DaimlerChrysler's stock has risen nearly 16 percent this year, narrowly lagging the European car sector index , and now trades at around 11.5 times estimated 2006 earnings versus 10.5 times for archrival BMW AG.

($1-.8366 Euro)