INVESTMENT FOCUS-Stalled revenues erode shine from Europe's profits

(Repeats, without changes, analysis first published on Friday)

* Profits up 10 pct in Q2, but revenues slip

* Earnings growth mostly stems from cost cutting

* Tensions with Russia start to bite into results

* Valuations stretched; but seen fair relative to bonds

By Blaise Robinson

PARIS, Aug 8 (Reuters) - Signs that European companies are failing to grow revenues in a frustratingly slow economic recovery are muting investors' relief that cost-cutting and cheap debt have at last delivered a rebound in profits.

Although Europe's second-quarter results season has produced evidence that profits are recovering, lacklustre revenue growth has led some analysts to trim their earnings forecasts further, their doubts fed by data showing Italy has fallen back into recession and Germany's powerhouse economy is stagnating.

Fighting in Ukraine and sanctions against Russia, a major energy supplier to Europe, have also muddied company forecasts, with multinationals including BP (LSE: BP.L - news) , Adidas (Other OTC: ADDDF - news) and Rheinmetall (Xetra: 703000 - news) warning of a hit to business.

Such uncertainty is likely to keep weighing on the stock market as investors balance fears of a severe correction against attractively-valued opportunities.

"Most investors have been betting on a recovery in both profits and revenues this year in Europe. Profits are on the rise but top-lines are going nowhere," said Frederic Rozier, fund manager at Meeschaert in Paris.

"With the macro deteriorating across the board now, it's going to be another year lost on the earnings front."

COST-CUTTING

European companies have aggressively cut costs and cleaned up balance sheets in recent years, helping them boost profits.

Firms have also enjoyed rock-bottom financing costs, locking in low rates in debt markets. Real-estate group Unibail-Rodamco and French utility Suez Environnement have both issued zero-coupon convertible bonds this year.

Overall, STOXX 600 firms have posted a 10 percent rise in second-quarter profits, rebounding after two years of contraction, data from Thomson Reuters Datastream shows.

In 2012 and 2013, investors had initially bet on a 13 percent rise in European earnings, but profits fell in both years.

While margins are improving this year and earnings are finally rebounding, revenue growth has steadily declined, from a rise of nearly 10 percent in 2011 to a drop of 1.5 percent during this year's second quarter.

Europe's earnings growth in the quarter has been stronger than that in the United States, where S&P 500 companies posted a 8.7 percent rise in profits, but on the revenue front, the contrast with Europe is striking: U.S. companies have seen top lines rise nearly 5 percent.

This reflects deflationary pressures and lack of economic momentum in the euro zone, analysts and fund managers said.

"All leading indicators have turned lower," said Claudia Panseri, global equity strategist at Societe Generale Private Banking, which has 116 billion euros ($155 billion) of assets under management.

"They were recovering until the start of the year but in the past few months they flatlined and now they're falling. That's cutting my top line estimates. With prices also falling, I see no growth."

ECB MOVES

Investors are paying close attention to the European Central Bank's response to the stains on the euro zone economy. ECB President Mario Draghi warned on Thursday that the bloc was more exposed than other regions to conflict in Ukraine

Acknowledging the economic recovery was "weak, fragile and uneven", Draghi gave an important signal that he would be ready to go further by printing money to buy assets such as government bonds, known as quantitative easing or QE.

For now, analysts' earnings downgrades outpace upgrades.

Without forecast upgrades from analysts, Europe's stock rally could be at risk given the region's high valuation ratios, said Francois Chevallier, strategist at Banque Leonardo.

"The rally of the past two years has been built essentially on a recovery of the price-to-earnings ratios, which makes it potentially fragile at this point," he said.

The rally that started in mid-2012 has propelled stocks to price-to-earnings levels not seen since 2005, with the STOXX 600 trading at 14 times expected profits.

But with interest rates still at rock-bottom, equity investors are aware that there are few other sources of yield.

"From a relative point of view, valuation levels are not excessive when compared to the very low bond yields," Chevallier said.

Despite the deterioration in Europe's economic outlook, companies - especially exporters - should find support in the second part of 2014 from a pick-up in U.S. and emerging economy growth, said JPMorgan European equity strategist Emmanuel Cau.

"Globally, there is strength coming from the U.S. and emerging economies, so the global background is getting more supportive for earnings. There will also be tailwinds from the fact that the euro has come down," he said.

"The recovery in earnings in Europe will be a slow process." (Graphic by Vincent Flasseur; Additional reporting by Francesco Canepa in London; Editing by Ruth Pitchford)