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Higher Performance Fees to Aid Legg Mason (LM) Q2 Earnings?

Legg Mason Inc. LM is scheduled to report its second-quarter fiscal 2018 (ended Sep 30) results tomorrow, after the market closes. This asset management company is expected to witness a rise in performance fees while distribution and service fees, and other service revenues are likely to fall.

Given the increase in assets under management (the Zacks Consensus Estimate of $746 billion shows 1.8% year-over-year rise) during the quarter, Legg Mason’s non-pass-through performance fees are projected to improve. The Zacks Consensus Estimate for non-pass-through performance fees of $8 million reflects 29.7% growth from the prior-year quarter. Nonetheless, management expects it to be in the range of $5-$10 million in the to-be-reported quarter.

However, distribution and service fees are anticipated to decline 15.8% year over year to $80 million. Also, the Zacks Consensus Estimate for other service revenues of $1.05 million indicates 27.6% plunge from the last-year quarter.

Overall, Legg Mason is expected to record a marginal fall in revenues. The Zacks Consensus Estimate for sales of $739.1 million shows a decline of 1.2% year over year.

On cost front, management expects compensation ratio to be down in the range of 54-55%, reflecting seasonal compensation decline. Nonetheless, we expect overall operating expenses to trend upward as the company continues to invest in franchise.

Further, we expect non-operating expenses to decrease in to-be-reported quarter as other income continues to rise.  

Notably, the Zacks Consensus Estimate for earnings in the to-be-reported quarter has been revised nearly 1.5% upward over the last 30 days to 69 cents, with all four estimates moving up. The Zacks Consensus Estimate reflects a year-over-year improvement of 9.5%.

Here is what our quantitative model predicts:

The chances of Legg Mason beating the Zacks Consensus Estimate in the to-be-reported quarter are high. That’s because it has the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or better.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks ESP: The Earnings ESP for Legg Mason is +0.97%.

Zacks Rank: Legg Mason currently has a Zacks Rank #3, which further increases the predictive power of ESP.

Legg Mason, Inc. Price and EPS Surprise

Legg Mason, Inc. Price and EPS Surprise | Legg Mason, Inc. Quote

Other Stocks That Warrant a Look

Here are some other stocks you may want to consider, as according to our model they have the right combination of elements to post an earnings beat this quarter.

Franklin Resources, Inc. BEN is slated to report fiscal fourth-quarter results on Oct 26. The stock has an Earnings ESP of +0.56% and a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Lazard Ltd. LAZ has an Earnings ESP of +1.39% and a Zacks Rank of 2. It is scheduled to report third-quarter results on Oct 26.

Santander Consumer USA Holdings Inc.’s SC Earnings ESP is +6.54% and it carries a Zacks Rank #2. The company is slated to release third-quarter results on Oct 27.

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