Commerce Can Shake Off Criticisms

This column was originally published on RealMoney on July 11 at 11:00 a.m. EDT. It's being republished as a bonus for TheStreet.com readers.

Commerce Bancorp(CBH Quote) shares dropped 7% last Wednesday, representing a loss of about $400 million in market value. This was in response to a Jesse Eisinger column in The Wall Street Journal that heaped negativity on the company.

The drop in Commerce's stock, which currently trades around $32 a share, is good news for bargain hunters. My calculations indicate that Commerce will be worth more than double the current quote, or $67 a share, by 2008, and worth triple the current quote, or $100 a share, in four years.

Investors interested in the upside opportunity in Commerce stock have to be able to see through the negativity in Eisinger's column. At a minimum, the bulk of the argument is misleading. I'll review where his conclusions go awry.

Growth

Eisinger first takes issue with Commerce's comparable-store deposit growth. According to disclosures made by Commerce, same-store deposit growth in the first quarter will be about 18%, and total first-quarter deposits will be up about 24%. The 24% total increase is derived from same-store deposit growth plus growth in deposits from new stores. The 18% same-store growth rate for the first quarter is down from an average same-store growth rate of 20.3% for 2005.

Consider this comment from the Journal column:

"The growth rate is falling ... the slowdown is just one sign that Commerce's vaunted business model is breaking down." To divine meaning from a slight decline off a high base is quite a stretch, particularly when it's based on just one quarter of data. To say that it is an indication that the "business model is breaking down" is nonsense.

The column also pointed out that Commerce's deposit growth was 29.7% in 2002, presumably so that readers could see a trend from 29.7% in 2002, to 20.3% in 2005, to 18% in the first quarter of 2006. The problem there is that Eisinger selected the peak rate -- 29.7% in 2002 -- and did not tell readers that the rate was 14.2% in 1999 and 15.1% in 2000.