Is Franklin (BEN) Likely to Disappoint This Earnings Season?

Franklin Resources, Inc. BEN is scheduled to report fiscal third-quarter 2016 (ended Jun 30) results before the opening bell on Wednesday, Jul 28.

In the last quarter, earnings of this this asset manager missed the Zacks Consensus Estimate and also came below the prior-year quarter figure. Results displayed lower revenues and net outflows. The quarter recorded a decline in assets under management (AUM) with lower expenses acting as a tailwind.

Notably, Franklin recorded negative earnings surprise in each of its trailing four quarters, with an average negative surprise of 8.26% as depicted in the chart below:

Factors to Impact Fiscal Third-Quarter Results

The U.S. markets remained unstable with heightened volatility from the start of the year, and only returned to the positive territory at the end of June quarter. Given Franklin’s AUM disclosure for Jun 2016, the upcoming release will exhibit lower AUM as well as net outflows. Asset classes under both equity and fixed income witnessed a decline compared to the prior year period.

Further, the upcoming results are likely to reflect expense pressure on the bottom line. Given the company’s continued investments in several areas, including strategic beta ETF, liquid alternatives and related solutions, bottom-line growth is likely to be impacted with higher expense in the quarter.

Also, Franklin is subject to numerous regulations by U.S. and non-U.S. regulators that add further complexity to the 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 its presence globally.

Additionally, activities of Franklin during fiscal third-quarter 2016 were not enough to win analysts’ confidence. As a result, the Zacks Consensus Estimate for the quarter remained stable at 66 cents over the last seven days.

Earnings Whispers

Our proven model shows that Franklin is less likely to beat the Zacks Consensus Estimate in fiscal third-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 66 cents.

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 proven model shows that these have the right combination of elements to post an earnings beat this quarter:

The Earnings ESP for LPL Financial Holdings Inc. LPLA is +2.33% and it carries a Zacks Rank #3. The company is expected to release second-quarter results on Jul 28.

Cullen/Frost Bankers, Inc. CFR has an Earnings ESP of +0.96% and a Zacks Rank #3. It is expected to report second-quarter results on Jul 27.

The Earnings ESP for Federated Investors, Inc. FII is +2.13% and it carries a Zacks Rank #3. The company is slated to release second-quarter results on Jul 28.

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