(FORTUNE Magazine) – It's finally here. After the worst recession since World War II, Europe's economies have recovered. Industrial production shot up at double-digit rates across the Continent over the past three months. Business confidence is climbing in Germany, and capacity utilization is rising in France. After shrinking 0.7% last year, European economies will grow 1.8% this year and 2.6% in 1995, on average, estimates Consensus Economics, a London research firm that collects forecasts from economists worldwide. On the back of this expansion, corporate profits are set to boom: Edward Kerschner, chief strategist at Paine Webber, expects earnings to jump 73% in Germany and 49% in France in 1994. That's an explosion worth investing in, and you can do it without leaving home. Jeffrey Applegate, chief investment strategist at CS First Boston, estimates that in normal economic periods, companies in Standard & Poor's 500- stock index generate about 30% of their profits abroad, over half of that from Europe. But in the past few years the international share has been slipping, pushed down by strong U.S. growth and faltering economies in Europe and Japan. Now Applegate expects foreign earnings to contribute more (see chart), surpassing the 30% mark by the late 1990s. Why not simply invest in shares of European companies? Because you'll find better buys shopping in the U.S. Morgan Stanley calculates that European stocks are selling at 18 times 1994 earnings on average, with P/E ratios hovering between 14 in Holland and 34 in Finland. Kerschner of Paine Webber tracks 33 S&P 500 companies that generate at least 25% of their revenues in Europe. He figures profits for these companies should emulate their European brethren's, jumping 67% this year and 24% in 1995. Yet they trade for just 16 times 1994 earnings. U.S. multinationals in economically sensitive businesses are poised for the biggest comeback. Consider Ferro, a specialty-chemical maker of coatings, colorants, and ceramics that normally generates almost 40% of its revenues in Europe. Sales on the Continent sagged 15% last year, and profits fell by half. But in the second quarter, European earnings leveled off -- for the first time since 1992. Brett Berry, a portfolio manager at Bailard Biehl & Kaiser in San Mateo, California, expects the revival to lift earnings to $1.65 this year and $2 next. He thinks the $25 stock will fetch $35 in nine months. York International sells air-conditioning and refrigeration units. The European business, which includes large-scale commercial projects such as cooling the Channel tunnel between France and England, generally produces much higher profit margins than York's domestic operations. Europe accounted for 25% of York's business and 30% to 35% of profits before the recession, estimates Prudential Securities analyst Jack Murphy. In 1994, by contrast, the Continent will contribute only 22% of revenues and 15% to 20% of profits. Next year, in the heart of recovery, earnings should be much better, he says. Murphy expects the $41 stock to advance 22% over the next 12 months.

Emerson Electric generates about a quarter of its sales on the Continent, selling motors and industrial instruments. Says Edward Bousa, a portfolio manager at Putnam: "Emerson is the best example of a global company that I know. Europe has been the soft part, but now that's picking up." Lately ; consumers in France and Germany have been buying blenders and washing machines powered by Emerson motors. Bousa expects Emerson to make $3.50 a share this year and $4 in 1995, lifting the stock from $63 to $70 or so in the next 12 months. Minnesota Mining & Manufacturing -- 3M -- is in so many businesses that its European operations act as a barometer of the local economy. Orders are picking up, and volume is improving. Says Jeffrey Cianci, an analyst at Bear Stearns: "3M is one of the most significant plays on the turn in Europe." Among the strongest sellers over the past two months: abrasives used in readying factory equipment. 3M's per share earnings should gear up from $3.15 this year to $3.60 next year, Cianci predicts. Don't overlook companies in the vanguard of the new economy: technology suppliers like Compaq Computer and Hewlett-Packard. These companies get a double bonus: Not only is Europe's economy recovering, it is also becoming more computerized. Michael Kwatinetz, an analyst at Paine Webber, looks at population and per capita income and concludes that Europeans could buy 50% more computers than Americans. Yet only 15% to 20% of potential European customers have computers, vs. over 50% in the U.S. Adds Paine Webber's Kerschner: "When Europeans need a computer, whom do you think they'll go to? American companies are leading players." Compaq, which recently became the top personal computer supplier in the U.S. (see Information Technology/Special Report), also holds that honor in Europe, commanding 12% of the European PC market. Kwatinetz expects that percentage to keep climbing, driving earnings up 19% next year and lifting the $36 stock at least that much. H-P, which sells everything from PCs to workstations to electronic measuring equipment, saw European orders surge 20% in the July quarter vs. the same period a year ago. Says David Wu, an analyst at S.G. Warburg: "H-P was doing well with a headwind. Now we're getting a tail wind, and they'll do spectacularly." The $88 stock should continue to climb, into the triple digits in the next 12 months, says Wu.

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