By Dave Marino-Nachison (TMF Braden)
May 17, 2000

Its shares up handily over the last 12 months -- and well ahead of the pace set by the Standard & Poor's 500 Index -- luxury goods purveyor LVMH Moet Hennessy Louis Vuitton (Nasdaq: LVMHY) will now celebrate with a move to boost trading liquidity, splitting its stock 5-for-1.

It's a rather funny notion: Though stock splits do nothing to the value of a company or its shares, they are sometimes credited with increasing investor willingness to trade the shares simply because of the lower per-stub dollar value. And so some companies split their shares to make them more psychologically accessible to investors -- but ritzy LVMH has never been about appealing to the cut-price crowd.

Well, whatever. The company expects strong operating numbers for 2000: Chairman Bernard Arnault, Bloomberg said, expects LVMH to turn in sales of about $8.9 billion this year, boosting operating profits 20% as global demand for its products continues to expand. "We're in a growing market," the chairman said at the company's annual meeting in Paris.

Investors should also expect more on the acquisition front from busy-bee LVMH, which seems to be constantly seeking new ways to augment its stable. The company today, for example, said it bought a majority stake in Italian pen maker Omas. Omas, around since 1925, had approximately $5.4 million in sales last year and will be folded into LVMH's new watches and jewelry division along with TAG Heuer, Ebel, Chaumet, and others.

Acquisitions have always been LVMH's stock in trade, as the company seeks to wrap up as many of the world's top brands as it can, backing them up with its own distribution capabilities and marketing muscle.

And so, as generally expected, the company recently raised $1.1 billion by trimming its stake in Diageo (NYSE: DEO), selling off 134 million shares of the U.K. consumer products giant, which encompasses liquor brands such as Guinness, Jose Cuervo, and Moet Hennessy, as well as Pillsbury and Burger King. That cash, after taxes, will very likely be funneled into the purchase pipeline.

The challenge for investors in LVMH, assuming they believe in the company and its ability to execute, may be trying to determine how much value each of its acquisitions and new divisions actually add. Its acquisitions aren't always immediately as accretive to the bottom line as they are to the top, as working out the details and getting the most out of products and sales channels can be a lengthy progress.

As a result, investors must be careful and ask themselves how much increased leverage LVMH can find in the super-luxury goods segment, where the strength of brand must be maintained at all costs. Every time a company expends its capital or equity, it should be the best possible way to build long-term value. In LVMH's case, its financial growth is largely driven by its Louis Vuitton luggage division, but that's not where its money is going. Nor has its press, with much ink and bandwidth devoted to its supposed interest in the auction business and perhaps even Sotheby's (NYSE: BID).

And so another year of 20% or better growth in operating profits after last year's 31% expansion might be impressive following late 1990s figures far worse (reread this Foolish news item for more). But investors would do well to remember that much of last year's pop in some areas such as champagne, liquors, and perhaps even jewelry and travel might have been caused by Year 2000-related bingeing and thus could be difficult to repeat in the near-term. Given the company's fairly rich 40x forward earnings valuation, it's certainly reason for care.

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