P&G Located in Mature Markets

Procter & Gamble Company's (PG) acquisition of Gillette should be accretive to earnings in fiscal 2008, but gross margin is being negatively impacted by increased commodity and energy costs. Margin expansion has been particularly affected in the fabric and homecare business. The Hold recommendation is maintained.

Procter & Gamble's current top-line and unit volume performance continue to impress investors. The management is committed to a growth strategy based on (1) driving volume through product innovation and increasing penetration into developing markets and (2) expanding profitability by focusing on higher-margin categories. The plan is meeting with success in terms of top-line expansion, volume growth, and higher earnings.

However, the long-term sustainability of the high volume growth is questionable, given competitive responses to the company's recent market share gains. Although geographically diverse, Procter & Gamble derives about 73 percent of its total sales from the mature markets of North America and Western Europe.

Despite two periods of restructuring, the stock has traded in a solid P/E multiple range of 17 to 25 over the last 15 years, reflecting the company's higher-than-average growth profile.

We do not expect Procter & Gamble to outperform until the current impediments to margin improvement abate, specifically, increased promotional spending to combat recently intensified competition and higher raw material costs. The target price of $71 is based on a 21 P/E on trailing 12-month earnings.

Wyeth's Long-Term Potential

Wyeth (WYE) possesses a strong product offering with key products Effexor XR (antidepressant), Prevnar (vaccine against childhood infections) and Enbrel (arthritis). The company also has a number of intriguing strategic alliances and several potential billion-dollar drugs in the late-stage pipeline. However, recent pipeline setbacks will cause a drag on financial performance.

The company has made progress with expanding labels of existing products and forging ahead with its late-stage pipeline. Bowel drug Relistor gained approval for post-operative ileus in Canada in early April which we hope will soon translate into approvals in other countries. Alzheimer's candidate bapineuzumab is a potential mega-blockbuster that could be the long-term future for Wyeth.

Unfortunately, we do not believe there is enough in the form of new products and expanding indications to make up for the pipeline failures and missteps and expect the net effect to anemic revenue growth. Earnings growth through 2009 will benefit from recently implemented productivity initiatives and share repurchases. We model revenues to grow only in the low-single digits through 2012.

We believe bapineuzumab's potential is allowing Wyeth's shares to trade at their current valuation. Going forward we believe the approvability of the drug will dictate whether the shares under or out-perform. We believe the current valuation is fair and maintain our Hold rating. Our $50 price target is 14.5x our 2008 EPS estimate of $3.45.

Deleveraging at Commerce Banc

Commerce Bancshares, Inc.'s (CBSH) diluted operating earnings of $0.63 per share were two pennies ahead of our estimate. Earnings were driven by stable net interest margin and strong growth in non-interest revenue, while the expenses remained under control. Credit metrics remained stable during the quarter. We maintain our Hold recommendation on the shares.

EPS growth remains a concern. Loan growth has been improving, with average loans rising an estimated 12% year over year in 2007, and 9.5% year-over-year in 1Q08. But planned de-leveraging of the securities portfolio has offset much of the loan growth in recent periods. With average securities still equaling 23% of average earning assets in the 1Q08, we expect that more de-leveraging will take place.

CBSH currently trades at 14.0 times the consensus forward estimate, a 53% premium to the peer group median. On a price-to-book basis, the shares trade at 1.89 times, a 51% premium to the peer median. Our six-month price target of $44 per share equates to a P/B multiple of 1.9 times our estimated book value per share six months out and also equates to 15.2 times our 2008 earnings estimate of $2.90 per share. With the $1.00 per share annual dividend, the target price implies a 7.2% expected total return over the period.