Zacks Investment Research downgraded shares of Chesapeake Financial Shares, Inc. (CPKF) from OUTPERFORM to NEUTRAL on January 10, 2014, with a target price of $18.25.
We are cutting our 2013 and 2014 diluted EPS estimates rather dramatically, following third quarter results and discussions with CPKF management. 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 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.
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