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(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 arefailing to grow revenues in a frustratingly slow economicrecovery are muting investors' relief that cost-cutting andcheap debt have at last delivered a rebound in profits.
Although Europe's second-quarter results season has producedevidence that profits are recovering, lacklustre revenue growthhas led some analysts to trim their earnings forecasts further,their doubts fed by data showing Italy has fallen back intorecession and Germany's powerhouse economy is stagnating.
Fighting in Ukraine and sanctions against Russia, a majorenergy supplier to Europe, have also muddied company forecasts,with multinationals including BP, Adidas andRheinmetall warning of a hit to business.
Such uncertainty is likely to keep weighing on the stockmarket as investors balance fears of a severe correction againstattractively-valued opportunities.
"Most investors have been betting on a recovery in bothprofits and revenues this year in Europe. Profits are on therise but top-lines are going nowhere," said Frederic Rozier,fund manager at Meeschaert in Paris.
"With the macro deteriorating across the board now, it'sgoing to be another year lost on the earnings front."
COST-CUTTING
European companies have aggressively cut costs and cleanedup balance sheets in recent years, helping them boost profits.
Firms have also enjoyed rock-bottom financing costs, lockingin low rates in debt markets. Real-estate group Unibail-Rodamcoand French utility Suez Environnement have both issuedzero-coupon convertible bonds this year.
Overall, STOXX 600 firms have posted a 10 percentrise in second-quarter profits, rebounding after two years ofcontraction, data from Thomson Reuters Datastream shows.
In 2012 and 2013, investors had initially bet on a 13percent rise in European earnings, but profits fell in bothyears.
While margins are improving this year and earnings arefinally rebounding, revenue growth has steadily declined, from arise of nearly 10 percent in 2011 to a drop of 1.5 percentduring this year's second quarter.
Europe's earnings growth in the quarter has been strongerthan that in the United States, where S&P 500 companiesposted a 8.7 percent rise in profits, but on the revenue front,the contrast with Europe is striking: U.S. companies have seentop lines rise nearly 5 percent.
This reflects deflationary pressures and lack of economicmomentum in the euro zone, analysts and fund managers said.
"All leading indicators have turned lower," said ClaudiaPanseri, global equity strategist at Societe Generale PrivateBanking, which has 116 billion euros ($155 billion) of assetsunder management.
"They were recovering until the start of the year but in thepast few months they flatlined and now they're falling. That'scutting my top line estimates. With prices also falling, I seeno growth."
ECB MOVES
Investors are paying close attention to the European CentralBank's response to the stains on the euro zone economy. ECBPresident Mario Draghi warned on Thursday that the bloc was moreexposed than other regions to conflict in Ukraine
Acknowledging the economic recovery was "weak, fragile anduneven", Draghi gave an important signal that he would be readyto go further by printing money to buy assets such as governmentbonds, known as quantitative easing or QE.
For now, analysts' earnings downgrades outpace upgrades.
Without forecast upgrades from analysts, Europe's stockrally 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 essentiallyon a recovery of the price-to-earnings ratios, which makes itpotentially fragile at this point," he said.
The rally that started in mid-2012 has propelled stocks toprice-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, equityinvestors are aware that there are few other sources of yield.
"From a relative point of view, valuation levels are notexcessive when compared to the very low bond yields," Chevalliersaid.
Despite the deterioration in Europe's economic outlook,companies - especially exporters - should find support in thesecond part of 2014 from a pick-up in U.S. and emerging economygrowth, said JPMorgan European equity strategist Emmanuel Cau.
"Globally, there is strength coming from the U.S. andemerging economies, so the global background is getting moresupportive for earnings. There will also be tailwinds from thefact 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 FrancescoCanepa in London; Editing by Ruth Pitchford)
