Neutral on Commerce Bancshares

Commerce Bancshares, Inc.'s (CBSH) fourth quarter '07 diluted operating earnings (excluding the litigation charge related to VISA) of $0.78 per share were in-line with our estimate, but a penny ahead of consensus. Earnings were driven by stable net interest margin and strong growth in non-interest revenue (bank card and trust fees had a solid growth during the quarter), while the expenses remained under control. Credit metrics moderated slightly during the quarter.

After reviewing the results, we are leaving our FY08 earnings estimate ($2.80 per share) and installing our FY09 at $3.20 per share. CBSH currently trades a 13.6 times the consensus forward estimate (versus 12.9 times at the time of our January 15, 2008 report), an 18% premium to the peer group median (versus a 35% premium at that time).

On a price-to-book basis, the shares trade at 1.96 times (versus 1.98 times at that time), a 23% premium to the peer median. Relative pricing continues looks fair on a P/E-to-growth (PEG) basis, using the consensus forward estimate and the consensus long-term growth rate. CBSH's PEG ratio is now 2.10, almost at par to the 2.09 median for the peer group (versus a 15% premium previously). On a price-to-book basis however, the 23% premium looks stretched, given a ROE of 11% above median (the ROE-adjusted P/B is 11% above median).

However, we feel that the premium is justified to some extent given CBSH's superior capital ratios, credit quality and net interest margin, its diversified revenue stream as well as lower exposure to the real estate loans, compared to its peers. We maintain our Hold recommendation on the shares of CBSH with a six-month target price of $44 per share, which equates to a P/B multiple of 2.07 times our estimated book value per share six months out (now June 2008) and also equates to 15.7 times our 2008 earnings estimate of $2.80 per share. With the $1 per share annual dividend, the target price implies a 6.9% expected total return over the period.

ASE Test a Hold, Pre-Meeting

ASE Test, Ltd. (ASTSF) is the world's largest independent provider of semiconductor testing and packaging services. The camera business (24% of last year's revenue) has been moved over to its new owner's -- Flextronics (FLEX) -- in-house facilities. The impact is substantial to both revenue and profitability. Reductions in headcount and equipment have occurred. We believe shares are poised for growth in the long term but the next two quarters could be challenging.

The shares are currently trading at 13.9x the current price to our fiscal year 2008 earnings estimate (P/E). The company is the largest player in a rapidly growing sector and should continue to benefit from the growth of the outsourcing model within semiconductor manufacturing. The testing segment has grown substantially over the past year, exceeding the industry growth rate by taking market share. The semiconductor manufacturing cycle has been in an up cycle since the third quarter of 2005, yet seems destined to be flat until the second half of 2008.

There are large die bank inventories at many semiconductor companies. We believe that the beneficiaries to an up-cycle will be the back-end manufacturers and not the foundries or capital equipment manufacturers. In a recent update, ASE Inc. has announced its intention to take ASE Test private for approximately $14.78 per share. A meeting is scheduled for May 6, 2008 to vote on the proposal. As a result of the possibility of the buyback by ASE Inc., our valuation is based on the buyback price rather than specific valuation metrics. We rate the shares as Hold with a six-month target price of $14.75. 

Sara Lee Sees Plan Succeed

Sara Lee Corporation (SLE) implemented the five-year Transformation Plan to create a focused consumer brand company generating sales growth in the range of 4% to 5% and earnings growth in the range of 5% to 8% by 2010.