Shares in Royal Philips Electronics NV (PHG) rose sharply Monday after it surprised the market with a second quarter net profit and raised its cost savings targets, but its outlook remains cautious.

Net profit for the three months ended June 30 was EUR45 million, compared with a net profit of EUR732 million in the same period last year. Analysts had expected a net loss.

That positive surprise lifted shares in early trade, and by 0930 GMT they were up 5.4% at EUR13.65, outperforming a 0.5% rise in the AEX index.

"Philips' second quarter earnings are better than expected," said SNS Securities analyst Victor Bareno. "Healthcare was a positive surprise, as margins showed resilience," he said. Bareno rates Philips at reduce.

Philips' margins improved on a quarterly basis due to cost savings, while insurance recoveries and legal settlements totalling EUR90 million before taxes also helped the bottom line.

Earnings before interest, taxes and amortization, analysts' preferred measure of operating performance, came in at EUR118 million compared with EUR396 million a year ago. The figure includes EUR148 million in charges. Analysts had expected Ebita to come in at a EUR69 million loss.

At its healthcare unit, sales fell 5% on a comparable basis. The Ebita margin at healthcare came in at 9.7%, excluding restructuring and acquisition related charges of EUR24 million, compared with 5.2% in the first quarter.

"The main positive in the results are the margins at the healthcare business," said Petercam analyst Eric de Graaf. He rates Philips at add.

The Amsterdam-based company posted a 19% drop in sales during the quarter, in line with expectations.

Chief Executive Gerard Kleisterlee said he remains cautious about the economy and the markets in which Philips operates, though the company sees some signs that the decline is bottoming out.

The company expects the comparative performance for the remainder of the year to be better than the first half, as cost savings have an increasing impact.

Philips now targets more than EUR600 million in annual cost savings, were it previously targeted over EUR500 million in annual cost savings by year-end.

 
   Company Web site: www.philips.com

- By Robin van Daalen, Dow Jones Newswires; +31 20 571 52 01; robin.vandaalen@dowjones.com