PARIS — Is she an LVMH Moët Hennessy Louis Vuitton prophet or a Gucci Group cheerleader?
This story first appeared in the December 2, 2002 issue of WWD. Subscribe Today.
That question goes to the heart of the $100 million lawsuit LVMH launched last week against Morgan Stanley. At issue in the lawsuit, which sent shock waves through the financial community, are allegations of bias and conflict of interest in Morgan Stanley’s equity research conducted by its chief luxury analyst, Claire Kent.
The investment firm categorically rejects LVMH’s claim and said it intends to defend itself “vigorously,” as reported. But in the lead-up to the first hearing, scheduled for Jan. 21 in Paris commercial court, scores of industry watchers will be meticulously debating the possible merits of LVMH’s case.
Many observers characterize the lawsuit as simple revenge, with LVMH chief Bernard Arnault lashing out at Morgan Stanley, Gucci’s longtime financial adviser. The American investment bank famously introduced Gucci executives to French retail titan Francois Pinault, the white knight who foiled Arnault’s hostile takeover attempt of Gucci. Pinault-Printemps-Redoute now holds a 53.2 percent stake in Gucci.
But sources said LVMH’s chilly relations with Morgan Stanley took a turn for the worse following Kent’s May 2000 downgrade of LVMH stock, from “outperform” to “neutral.” Kent, who declined all comment on the case, has maintained the neutral outlook ever since.
“We are revising our outperform rating downwards,” Kent wrote at the time in her report. “We believe that the first quarter of 2000 represented the group’s peak in terms of growth for the year.”
In fending off LVMH’s charges, Morgan Stanley is expected to argue that its neutral rating on LVMH was hardly conspicuous — even if it was in the minority. According to ratings of 24 other banks compiled by JCF Finance Group in May 2000, 16 were overweight or positive, five were neutral and three had no rating on the stock.
Merrill Lynch, according to JCF Finance, upgraded LVMH stock to overweight just a few days before Morgan Stanley’s downgrade. Merrill Lynch declined to comment on this decision, saying only that it has changed its rating four times since 1999. A Nov. 20, 2002 Merrill Lynch report on LVMH lists it as a buy with a medium volatility risk.
But Morgan Stanley will likely defend Kent’s downgrade on LVMH as prescient, since LVMH’s share price has dropped by about half since May 15, 2000. Gucci by contrast, which Morgan Stanley kept at strong buy or overweight, has had a more stable stock performance. Its stock price rose about 3.6 percent over the same period.
Morgan Stanley currently assigns an “overweight” rating on Gucci Group, given the fact that the stock is underwritten by PPR, which is obliged to conduct a tender offer for all Gucci shares at $101.50 in March 2004. Kent has had an “outperform” or better rating on Gucci since March 1998, with a “strong buy” recommendation put out from September 1998 through to January 1999.
Shares of LVMH closed Friday at $46.93 on the Paris Bourse, down 0.7 percent. Gucci’s closed at $90.10, down 54 cents, or 0.6 percent, on the New York Stock Exchange.
Beyond the ratings of stocks, LVMH’s lawyers are expected to focus on nuances in Kent’s reports. There have been some 18 reports devoted to LVMH since the May 2000 downgrade.
A survey of Kent’s writings on LVMH over the period suggest a healthy skepticism. The words “uncertain” and “cautious” pepper her writing, but often in describing conditions affecting the entire luxury sector.
Other statements are more pointed.
“We are reiterating our negative stance on LVMH,” says a report dated May 3, 2001. “We have a neutral rating; we have concerns over valuation and the impact of the likely luxury slowdown in 2001….We continue to believe investors should take profits,” according to the same report.
It is believed several of Morgan Stanley’s notes aggravated LVMH. In a Jan. 24, 2002 report, for example, Morgan Stanley urged the market to beware of prolonged weakness in the yen. Sources suggested LVMH will argue that Kent overstated the risk, failing to mention the French group’s well-publicized currency hedging policy.
Kent’s warning of a potential downgrade of LVMH’s credit rating, detailed in a July 17 note, is also believed to be a thorn in LVMH’s side. “We believe that while this is not imminent, it cannot be ruled out over the next months,” Kent wrote. “We also believe that this would hurt sentiment for the stock.”
By contrast, a Lehman Brothers report on the same date highlights LVMH’s disposal of Pommery and other financial and real estate assets for aiding its cash position. “Indeed, the company indicated that its target of reducing net debt levels to 6 billion euros, from 7 billion euros, by year end has already been achieved,” the note says.
Meanwhile, a Goldman Sachs study from the same date cites weaker than expected sales at LVMH, but describes a “very strong restructuring story.”
According to Standard and Poor’s, there have been no changes in LVMH’s credit rating since last April, when it initiated coverage. Current ratings are long-term “BBB+” and short-term “A2.”
In her most recent report, dated Sept. 13 after LVMH’s declaration of a 2 percent increase in first-half sales, Kent reiterates her caution on luxury and writes “we still favor Richemont or Gucci over LVMH on a 12 to 18 month view.”
But Kent has not always dissed LVMH. In a report dated Aug. 1, 2002, discussing a darkening second-half outlook for the crucial Japanese market, Kent lowered earnings per share (EPS) targets for Gucci, Bulgari, Hermès and Swatch, while raising them slightly for LVMH and Richemont.
As part of its defense, it is understood that Morgan Stanley’s lawyers will argue that Kent has been balanced in her research, always mentioning positives and negatives about all companies she covers.
Meanwhile, LVMH’s allegations of bias could go beyond Morgan Stanley’s research on LVMH stock and suggest favored treatment for other Morgan Stanley investment-banking clients like Burberry and Bulgari. LVMH is said to have noticed that Kent held out longer than some of her counterparts before recognizing the changing fortunes at Bulgari. Kent downgraded Bulgari on Nov. 7, 2002, to equal weight from overweight as she slashed earnings targets on the jeweler and five other luxury goods stocks in a note entitled “The Party’s Over.”
Lehman Brothers cut Bulgari to equal weight on Sept. 16 and Goldman Sachs cut Bulgari to underperform on May 16. Still, other analysts — including UBS Warburg and Deutsche Bank — are optimistic about a turnaround and rate Bulgari a buy.
Meanwhile, fund managers are Kent fans. Hundreds of them have ranked her as the top analyst in her field for seven of the past eight years, according to Institutional Investor magazine’s annual poll.
“She clearly has her supporters in the fund management industry,” said Andrew Capon, the Institutional Investor’s senior editor.
In the most recent edition of the survey, published in February, Kent edged out Deutsche Bank’s Virginie Tibloux-Galas and Merrill Lynch’s Antoine Colonna.
“In an industry where people fall in love with concepts, she’s valuation-oriented,” Institutional Investor quoted one client as saying.
The magazine also queried investors on what characteristics they value most in brokerage firm research. Country/industry knowledge came in first, followed by trustworthiness, accessibility/responsiveness and independence from corporate finance.