CapitalSource shares dip as analysts see rising credit costs

Shares fell 47 cents, or 3.9 percent, to $11.45 in midday trading. Shares have traded between $7.56 and $27.40 in the past 12 months.

On Monday, the Chevy Chase, Md.-based commercial lender said it planned to acquire the retail banking operations of Fremont General Corp. The deal includes 22 branches and $5.6 billion in deposits.

"This transaction will give the company a more consistent source of funding, while improving the ability to increase leverage for more senior assets," said Scott Valentin, an analyst at Friedman, Billings, Ramsey & Co., in a note to clients.

Valentin estimated that the acquisition should increase earnings by 6 cents per share in 2008.

However, Valentin noted that the benefits of the deal do not outweigh rising commercial credit costs.

As such, Valentin lowered his first-quarter profit estimate to 52 cents per share from 63 cents, and his full-year estimate to $2.20 per share from $2.37 per share. Analysts polled by Thomson Financial, on average, estimate first-quarter earnings of 52 cents per share and full-year earnings of $2.07 per share.

Valentin also reiterated a "Market Perform" rating on the stock and cut his target price by $1 to $15.

Wachovia Capital Markets analyst Jim Shanahan agreed, saying that the shares are fairly valued given a weaker outlook and a challenging environment.

"CapitalSource shares have been under significant stress of late due primarily to concerns regarding capital adequacy and liquidity," Shanahan wrote in a note to clients. "Since CapitalSource will be inheriting $3 billion of cash and short-term investments, which can be used to pay down credit facilities, we believe this transaction greatly reduces liquidity risk over the near term. However, we believe the company will face further headwinds through the balance of the year due to deteriorating credit quality and the potential for a dividend reduction."