Following the 40 percent surge in Orrstown Financial Services ORRF shares over the past 14 months, Michael Perito of Keefe, Bruyette & Woods believes the current valuation better reflects the company’s “ongoing fundamental momentum and recent progress in growing the franchise.”
Perito downgraded the rating on the company from Outperform to Market Perform, while lowering the price target from $23.00 to $21.50.
Modest Premium
The analyst mentioned that following the 40 percent increase, the stock now trades at a modest premium to “similarly profitable” SMID-cap banks, although the premium appears warranted, given Orrstown Financial’s above average growth outlook.
Perito believes that “for the shares to be materially revalued higher from current levels, the company will likely have to improve its profitability to more peer like levels, which could eventually warrant a P/E based valuation.”
Estimates Revised
The analyst revised the estimates for the company to reflect expectations of a higher near term expense run rate, against the backdrop of recent hires at the senior level, as well as increased loan growth.
The 2016 EPS estimate has therefore been lowered from $0.90 to $0.88, while the 2017 EPS estimate has been left unchanged due to expectations of stronger loan growth beginning to offset the higher expenses.
The EPS estimate for 2018 has also been raised from $1.18 to $1.22, to reflect “higher growth and a larger balance sheet.”
“Despite the change in rating, we still view ORRF's story favorably and believe that the shares represent a solid long-term core holding in the SMID-cap bank space,” Perito added.
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