Will Higher Expenses Hurt Franklin's (BEN) Q1 Earnings?

Franklin Resources, Inc. BEN is scheduled to report fiscal first-quarter 2016 (ended Dec 31) results before the opening bell on Feb 3.

In the last quarter, this asset manager recorded a negative earnings surprise of 24.4%.  Results reflected a decline in revenues. Also assets under management (AUM) declined on a year-over-year basis and the quarter witnessed net outflows. However, decreased expenses acted as a tailwind for the quarter.

Will Franklin miss earnings this quarter as well, given the challenges that the industry witnessed during the quarter? Let's see what factors might have influenced the earnings report this time around.

Factors to Impact Fiscal First-Quarter Results

Though the overall market remained volatile during the quarter, major U.S. equity indexes witnessed an uptick that favorably impacted the investment management industry. However, given Franklin's AUM disclosure for December 2015, the upcoming release will reflect lower AUM as well as net outflows.

Further, the upcoming results might reflect expense pressure on the bottom line. Notably, management anticipates higher compensation costs in the first-quarter of fiscal 2016, reflecting seasonality. Moreover, as a result of potential changes in strategic marketing campaigns, the level of advertising and promotion expenditures might increase more rapidly than revenue, thereby affecting bottom-line growth.

Also, Franklin is subject to numerous regulations by U.S. and non-U.S. regulators that add further complexity to ongoing global compliance operations and can thereby hurt profitability.

Nevertheless, we believe the company's top line should get support from its diversified portfolio offerings and global footprint.

Activities of Franklin during fiscal first quarter 2016 were inadequate to win analysts' confidence. As a result, the Zacks Consensus Estimate for the quarter remained stable at 74 cents per share over the last 7 days.

Earnings Whispers

Our proven model shows that Franklin is likely to miss the Zacks Consensus Estimate in fiscal first quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy) or at least #2 (Buy) or #3 (Hold) for this to happen. Unfortunately, this is not the case here as elaborated below.

Zacks ESP:  The earnings ESP for Franklin is 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate stand at 74 cents per share.

Zacks Rank: Franklin's Zacks Rank #3 (Hold) increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of an earnings surprise call.

Stocks That Warrant a Look

Here are some stocks you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:

CNO Financial Group, Inc. CNO has an Earnings ESP of +2.70% and carries a Zacks Rank #3. It is expected to report results on Feb 9.

Earnings ESP for American Capital, Ltd. ACAS is +12.50% and it has a Zacks Rank #1. The company is slated to report on Feb 23.

TCP Capital Corp. TCPC has an Earnings ESP of +2.44% and a Zacks Rank #3. It is scheduled to report results on Feb 29.

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