(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 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, Adidas and
Rheinmetall 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
"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."
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
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
"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
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
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)