Economy at a crossroads: earnings rebound distant.

First the tech bubble burst. Then came the terrorist attacks, followed by a series of corporate accounting scandals. Now there's the growing possibility of war with Iraq.

As corporate executives, economists and investors try to size up the economic future, one key ingredient is missing: a good sense of where corporate earnings are headed.

In the just-completed fourth quarter, earnings at the S&P 500 companies were expected to come in around 15 percent higher than the year-ago period, said Chuck Hill, director of research at Thomson First Call, which tracks earnings estimates. But after a series of major charges, including asset writedowns at AOL-Time Warner Inc. and corporate liability losses at insurer American International Group Inc, fourth quarter earnings will end up rising only 11 percent, he said.

The first quarter isn't looking much better. After slashing estimates last fall, analysts took a break over the holidays, giving Hill some hope that the machetes were put away. They weren't. "Unfortunately, the slashing is continuing, and we've hit a soft spot in earnings," Hill said.

First quarter earnings growth will likely be 8 or 9 percent--pretty anemic considering that the year-ago comparison was during a recession. And the second quarter prospects remains murky. "I think everyone's feeling their way," Hill said.

Never an easy job, predicting earnings has become especially difficult as of late, said Alan Adelman, chief investment strategist at Wells Fargo Private Client Services in Beverly Hills.

"The art and science of forecasting has gotten more difficult because there are variables that are unique to the environment that we're in," said Adelman, who is responsible for $40 billion in assets.

By this point in the economic cycle, many companies have pared back expenses to preserve profits, Adelman said. It will take revenue increases to feed profit growth from here on out, he said.

Fragile economy

According to data from Bloomberg and I/B/E/S, analysts have lowered current-year earnings estimates for 15 local companies by 5 cents a share or more in the past four weeks. Only 11 companies among the LABJ 200 saw upward revisions of the same magnitude.

Local companies including Hilton Hotels Corp., video game maker THQ Inc. and Guess Inc., the denim clothing manufacturer, are struggling with slow demand. Earnings estimates at all three companies have fallen in recent weeks.

A fragile economy and uncertain world political situation will limit business travel and put pressure on room rates, said Stephen F. Bollenbach, Hilton's chief executive, when the company reported fourth quarter earnings on Jan. 27. With health care and insurance costs rising, "it's clear that a more cautious outlook for 2003 is warranted," Bollenbach said in a statement issued with the earnings report.

Even companies doing relatively well have found it hard to find takers for their stock. A number of homebuilding and mortgage-related companies have seen earnings projections bump up over the past few weeks, but investors don't seem to believe the results are sustainable.

"Every quarter the analysts raise their estimates, every quarter the companies crush them," Hill said. At some point it's got to stop but (there's) no sign of it."

Calabasas-based homebuilder Ryland Group Inc., which has produced record earnings for four years in a row, imdes at a relatively paltry price-earnings ratio of 5.9, compared with a P/E of 30 for the S&P 500. KB Home, another local homebuilder, is trading at 6.3 times earnings.

Part of the problem, said Ryland Chairman and Chief Executive R. Chad Dreier, is that money managers don't understand the depth of demand for inexpensive homes in places like Dallas, where a new, 2,000 square foot home costing $135,000 can be had for a monthly mortgage payment of $900.

Adelman said even companies with strong earnings momentum might not see those results reflected in their stock price.

That's because investors' memories are still fresh from devastating losses in Internet companies, and the realization, post 9/11, that terrorism can strike on U.S. soil. Weighing further on their minds are the accounting scandals and conflicts of interest that have plagued Wall Street.

"We will always have issues like the potential war with Iraq or (the crisis in) Venezuela, but what we've had prior to that is three events of such magnitude that I think it's going to have an impact on investors' psyche for a number of years to come," Adelman said.

A revved up economy, and the ensuing earnings rebound, would go a long way to restoring some of that confidence. But the investment binge that led to the current economic downturn is difficult to climb Out of.

The economy remains saddled with excess capacity, Hill said. As a result, capital spending is depressed. Businesses aren't investing enough in factory equipment, for example, to loosen the economy from its moorings. "We've got too many automobile plants, we have too many burger joints, we have too many aluminum smelters," he said.

Economists were hoping for a rebound in capital spending by the third quarter of 2002, but it didn't happen. Then hopes shifted to the current first quarter, and they haven't panned out. Now the capital spending rebound has been put off until at least the third quarter.

Earnings Outlook

Shifts in estimates pace stock price movement at L.A. companies.

                                           2003   Change   Feb.5
                                2002       EPS    in 2003  Stock
Company Name                    EPS       (Est.)   Est.    Price

Upward Revisions

Ryland Group                   $6.64      $7.44   +$0.65   $39.86
Countrywide Financial Corp.     6.49       7.50    +0.52    54.17
Occidental Petroleum Corp.      3.07 (1)   2.77    +0.30    29.20
FirstFed Financial Corp.        3.15       3.08    +0.25    29.06
KB Home                         7.15 (2)   7.72    +0.14    46.22
OSI Systems Inc.                0.60 (3)   1.06    +0.13    18.99
Seebeyond Technology Corp.     (0.29)     (0.11)   +0.12     2.12
Nara Bancorp                    2.70       2.24    +0.11    22.01
Hawthorne Financial Corp.       2.88       3.30    +0.05    29.45
International Rectifier Corp.   0.75 (3)   0.73    +0.05    19.86

Downward Revisions

Northrop Grumman Corp.         $6.07 (4)  $4.19   -$1.03   $92.44
Pacific Energy Partners LP      0.68       1.19   (0.50)    19.79
Metro-Goldwyn-Mayer Inc.       (0.75)     (0.16)  (0.18)     9.85
Qualstar Corp.                  0.22      (0.09)  (0.11)     4.80
Digital Insight Corp.           0.97       0.56   (0.10)    10.15
Hughes Electronics Corp.       (0.70)     (0.12)  (0.09)     9.98
Hilton Hotels Corp.             0.53       0.45   (0.09)    11.61
Hanmi Financial Corp.           1.22       1.35   (0.09)    16.34
PFF Bancorp                     2.74 (5)   2.74   (0.09)    32.11
Electro Rent Corp.              0.53 (6)   0.35   (0.08)    10.65


                                 YTD
Company Name                   Change

Up ward Revisions

Ryland Group                   +19.5%
Countrywide Financial Corp.     +4.9
Occidental Petroleum Corp.      +2.6
FirstFed Financial Corp.        +0.4
KB Home                         +7.9
OSI Systems Inc.               +11.8
Seebeyond Technology Corp.     (12.8)
Nara Bancorp                    +6.5
Hawthorne Financial Corp.       +3.2
International Rectifier Corp.   +7.6

Downward Revisions

Northrop Grumman Corp.          (4.7%)
Pacific Energy Partners LP      +0.2
Metro-Goldwyn-Mayer Inc.       (24.2)
Qualstar Corp.                 (12.2)
Digital Insight Corp.          +16.9
Hughes Electronics Corp.        (6.7)
Hilton Hotels Corp.             (8.7)
Hanmi Financial Corp.           (1.9)
PFF Bancorp                     +2.8
Electro Rent Corp.             +13.1

(1) Before one-time charges for discontinued operations and accounting
changes.

(2) Year ended November, 2002.

(3) Year ended June, 2002.

(4) Economic earnings: does not include pension income or loss.

(5) Year ended March 2002.

(6) Year ended May 2002.

Sources: Business Journal research; Bloomberg LP/IBES