Commerce Can Shake Off Criticisms

I believe it is reasonable to expect the yield curve will revert to a more normal slope over the next couple of years -- either short rates will decline or long-term rates will increase. Over the last 100 years and more, flat to inverted curves have proved to be transitory because of the economic dislocations and distortions that they cause (e.g., affecting the incentive to invest and lend).

My assumption of a price-to-earnings ratio of 18 to 20 in 2010 for Commerce is conservative, in my view. Great organic growth stories are exceedingly rare, and typically are priced by the market with price-to-earnings ratios in the 25 to 35 range. Further, most great organic-growth stories do not have earnings leverage as powerful as the Commerce operating model.

Most models increase earnings by selling more product. In order to sell more product, they need to acquire or manufacture more product. That increases the cost of goods sold. Commerce has a major advantage in this regard. Once a Commerce store matures and operating costs are covered (almost always by the second year), there is negligible cost of goods sold associated with additional deposit growth. This provides a significant magnifier effect to the model's earnings leverage, something observers will see as the store base matures.

Liquidity in the Financial System

The fans long have figured the stock was worth the price because they thought Commerce had cracked the growth code. But the model wasn't so mysterious: It worked because the world was awash in cheap money. When rates were near zero, it doesn't matter what a customer gets on a certificate of deposit. Friendly service stands out. But as rates have risen, customers have started to relearn that Spinal Tap tune, "Gimme Some Money."

That is a cute characterization, to be sure, but it's false. It is inaccurate to say the model "worked because the world was awash in cheap money." Either Eisinger did not check Commerce's record or has to make the embarrassing case that the world has been "awash in cheap money" for more than 20 years.

The Commerce model has thrived as a deposit-gathering machine each and every year, in all varieties of interest-rate environments, for more than 20 years. It's interesting to note that Commerce's long-term business value growth does not correlate to whether money is cheap or tight. Rather, the business value of Commerce has moved upward in concert with deposit growth.

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