By Ann Heffron, CPA, CFA
Following a disappointing third quarter when Chesapeake Financial Shares, Inc.’s (CPKF) third quarter net earnings fell 38% to $1.5 million, we are cutting our 2013 and 2014 diluted EPS estimates rather dramatically.
Click here to download a free copy of the CPKF research report: CPKF 1-10-14
Specifically, we are reducing our 2013 diluted EPS estimate by $0.26 to $2.10 from $2.36, largely to reflect the $0.20 third quarter shortfall from our estimate, plus an additional $0.06 in the fourth quarter, stemming from higher projections for merchant card and cash flow expenses.
For 2014, we are slicing our diluted EPS estimate by $0.57 to $1.95 from $2.52 for four reasons.
First, we have significantly increased our estimate for compensation expense to reflect a number of new hires, including the addition of six noncustomer-facing (nonrevenue-generating) employees, in part related to increased compliance and the current regulatory environment, and the filling of a couple of spots that were vacant for a good part of 2013.
Second, we have lowered our estimate for income from fiduciary activities due to the loss of a significant client relationship in 2013’s third quarter.
Third, merchant card income will be lower as CPKF has cut the number of independent sales organizations (ISOs) to four from five.
Finally, CPKF has scaled back the cash flow business to improve its risk profile and enhance profitability.
At the same time, we are reducing our recommendation to Neutral from Outperform and lowering our target price to $18.25 from $24.50.
While we recognize that CPKF is still undervalued particularly on a book value basis, we believe that there is no immediate catalyst to drive the stock price higher over the near term, especially in view of what we imagine will be a tough 2014.
Chesapeake Financial Shares, Inc. is a financial holding company headquartered in Kilmarnock, Virginia, with $659 million in total assets at September 30, 2013. CPKF is predominantly a small business lender with 12 branch offices that serve customers in the eastern region of Virginia between the Potomac and James Rivers. These offices are located in Kilmarnock, Lively, Irvington, Mathews, Hayes, and Gloucester, with five branches in Williamsburg. CPKF, which began as Lancaster National Bank on April 13, 1900, has a long history and strong ties with the communities it serves. In addition, CPKF opened a commercial loan production office in Richmond, Virginia in mid-August 2011.
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