Last checked at 
* Europe enjoys best earnings season vs analyst forecastssince Q3 2012
* Profits still falling, but revenues picking up
* Data shows better-than-expected GDP growth in euro zone
* Emerging market turmoil to weigh on some companies
By Maria Sheahan and Blaise Robinson
FRANKFURT/PARIS, Feb 14 (Reuters) - Europe's corporateprofits are still eroding but investors are at last starting tosee glimmers of hope, with revenues picking up, domestic demandrecovering and good news from exposure to the United Statesmaking up for bad news in emerging markets.
Recent weakness in emerging markets - which hit a number ofEuropean multinationals such as Nestle, AB InBev and Holcim - could delay the long-awaitedEuropean earnings recovery, but probably won't derail it.
European companies have been aggressively reducing costs andcleaning up their balance sheets in the past few years. They areslowly starting to reap the benefits as global growth recovers,driven by the improved momentum in developed countries.
Half way into Europe's earnings season, headline numbers arestill dire: restructuring costs and currency factors helpeddrive profits nearly 5 percent lower in the quarter compared tothe fourth quarter of 2012.
But a pick-up in corporate revenue, up 2.3 percent, isfuelling investors' hopes that the worst days are over.
Results have been good compared to analyst expectations,with 58 percent of companies reporting profits in line or higherthan forecasts - Europe's best score since the third quarter of2012, according to Thomson Reuters StarMine data. And surveys ofbusiness such as the Purchasing Managers' Indexes are upbeat.
"The European PMIs for January were very good, especiallythe figures for Germany. There's no doubt things are gettingbetter in Europe," said Ollie Beckett, fund manager at HendersonGlobal Investors, which has £70.8 billion ($118 billion) inassets under management.
"Europe has just been through two-three years of severe costcutting, so as soon as the European economy picks up a bit, itwill spark a big bounce in profits," he said.
POSITIVE SIGNALS
Domestic demand is the key to a recovery. Data showed onFriday the euro zone economy grew 0.3 percent in the fourthquarter of 2013, more than expected, after a 0.1 percent rise inthe third quarter.
Companies across the region - including cancer drug makerRoche, telecom major Vodafone and the world'sbiggest steelmaker ArcelorMittal, recently cited earlysigns of improvement in Europe which should bolster earnings.
"Europe is still tough but there are a number of leadindicators," Vodafone Finance Director Andy Halford toldreporters this month, and ArcelorMittal forecast European steeldemand would return to growth this year.
Banks including Spain's Santander, the euro zone'sbiggest lender, France's Societe Generale and Dutchgroup ING have also reported improved earnings as theyshed bad debts and losses they suffered in the global financialcrisis.
Even the overall year-on-year fall in profits was notnecessarily bad news for investors: much of it was due toone-off restructuring charges, which should leave companies in abetter position in the future.
For example, ThyssenKrupp posted a better thanexpected quarterly operating profit on Friday, despite a netloss because of one-off charges related to the sale of a stakein Finnish steelmaker Outokump. Big banks like BNP Paribas and Credit Suisse saw profits hit by costlylegal settlements, but that removes future litigation risk.
There is still ample room to recover. Europe's corporateprofits overall are still 23 percent below their peak of 2008,while U.S. corporate profits have rebounded to 23 percent abovetheir 2008 peak, according to Thomson Reuters Datastream data.
"Just a bit of economic growth would be enough to spur a bigrebound in corporate profits because of improved operatingleverage," said Mathieu L'Hoir, strategist at AXA InvestmentManagers, which manages 536 billion euros ($727 billion).
"In Europe, profit margins are still around 5.5 percent,versus 9 percent before the economic crisis, while in the U.S.,margins are already back to 9 percent. A rise to 7.5 percent inmargins in Europe would spark a 40 percent bounce in profits."
Even troubled southern Europe, where demand collapsed at thestart of the euro zone debt crisis, is starting to show signs ofrecovery, some analysts say.
"A strong domestic growth recovery is likely to be thelargest source of upside surprise for the Southern Europeaneconomies," Deutsche Bank strategists said last week.
ROLLER-COASTER RIDE IN EMERGING MARKETS
But an improving European economy has not filtered throughto everyone yet, with food makers and retailers in particularstill hurting as shoppers' disposable income is squeezed bysubdued wage growth and austerity measures.
Nestle warned on Thursday that 2014 would beanother challenging year as weaker emerging markets demand addsto pain from pricing pressure at home.
Europe's No.1 retailer Carrefour saw its sales inEurope shrink last quarter due to a tough market environmentfrom Italy to Poland, in addition to being hit by adeterioration in Brazil and China, the two major emergingmarkets it has earmarked for expansion.
"We're just coming out of a deep recession, and you're goingto need a longer than normal period of decent GDP growthbefore you are likely to see significant earnings improvements,"Macquarie analyst Daniel McCormack warned.
"Also, demand from emerging markets is more sluggish thanexpected. Growth there is weaker, and there is less pent-updemand than in the last cycle."
European blue-chips are more exposed to emerging marketweakness than American and Japanese peers. According to datafrom MSCI, companies listed on the MSCI Europe index have about 24 percent exposure to emergingmarkets, versus 15 percent for MSCI USA and 14percent for MSCI Japan.
Swiss engineering group ABB, among those saying itsaw more encouraging growth in many parts of Europe, cut itsmedium-term sales outlook on Thursday, citing a more cautiousstance on emerging markets.
In addition, many European companies' sales and earningshave been hurt by the drop of currencies from the Japanese yento the Indian rupee or the Australian dollar against the euro.
HeidelbergCement, the world's fifth-biggest cementmaker, has for instance warned that exchange rate fluctuationswould continue to impact its earnings this year after a weakerIndonesian rupiah and Australian dollar caused it to fall shortof its own targets for 2013.
But for many European companies, bad news from emergingmarkets is offset by good news from exposure to the unexpectedlyrobust United States. Belgian supermarket group Delhaize, which makes about 60 percent of its revenues in theUnited States, surpassed expectations for sales growth there inthe fourth quarter.
Overall, global investors are increasingly positive aboutEurope's prospects, reflected in huge inflows into the region.
Data from Thomson Reuters Lipper shows that U.S.-based fundshave poured $4.1 billion into European equities since the startof the year, $778 million in the past week alone, a 33rdstraight week of net inflows - marking the longest streak ofweekly inflows since Lipper started to monitor flows in 1992.
