Straight Talk About Warnaco

Warnaco's investment bank is no less than prestigious Morgan Stanley, which helped underwrite its initial stock offering in 1991 and a subsequent secondary offering. But Morgan's high visibility--and scrupulous analysis--could also become a liability.

That proved to be the case after Warnaco, a major maker of women's intimate apparel and menswear, came out with its fourth-quarter earnings on Feb. 11. Morgan analyst Sharon Rappaport retained her buy rating on Warnaco, although she noted in an internal report, dated Feb. 17, that "there was a shortfall" in Warnaco's noncore businesses, which prompted her to cut her 1993 estimate from $2.75 to $2.35.

That was enough for the bears. They sold the stock short, and by Feb. 18, it was down to 27 from 33 3/4 just a week before. The shorts believed that if Warnaco's own investment banker expressed concern, the company must really be in trouble.

However, other analysts didn't quite agree. William Smith and Catherine Blednick at Smith Barney, Harris Upham issued a buy rating on Feb. 23, noting that Warnaco was unduly punished in the wake of a slight revenue disappointment in a difficult environment for apparelmakers. The "fundamentals are much more robust than the stock price suggests," says Smith. Morgan's Rappaport raised her 1993 estimate to $2.75 from $2.35--the same day. But to Warnaco, the harm had been done. The irony was that the company's 1992 earnings of $2.01 met Morgan's expectation of $2. The stock closed at 28 5/8 on Mar. 9. To some pros, it's a buy at this level.

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