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Katya Kazakina kicked off a silly season of needless speculation about the causes of Sotheby’s rise in stock price last week. As is natural for a Bloomberg reporter, Kazakina’s story on Sotheby’s stock hitting a 10-year high relied upon Wall Street analysts to explain the momentum. The problem with this approach is that none of the analysts who cover Sotheby’s have been known to have any trenchant insight. Also, no sooner had Kazakina pointed out the peak in share value, it retreated with the overall market.
Absent from this discussion (that mostly repeats the corporation’s own talking points) is the obvious driver of the overall rising stock market. BID is company that follows the broader market. Above is a chart of BID over the last five years—beginning a year before the activist fight to replace Sotheby’s management—that shows the stock just now catching up the overall rise in the S&P 500.
If you want to know why Sotheby’s stock is at an 10-year high, you don’t need to look much further than the observation that the stock market is as an all-time high.
But there is so much more to it than that. Let’s start with what the analysts believe to be the causes. A little close reading of their bullet points doesn’t support much of what they say is driving the stock. More to the point, Sotheby’s will release earnings less than a week. Then we will know a great deal more about the business and whether it is making real progress to raise earnings to a point that can justify the current stock price—or, even, a much higher one.
The big driver of expectations for Sotheby’s right now is the massive sale of Basquiat’s untitled head for $115m. What we don’t know yet is how much of a bellwether that sale was either for the top of the art market or for Sotheby’s ability to move commissions to the bottom line. Here’s one analyst Kazakina spoke to:
“There’s been a momentum at the very high end of the market,” David Schick, lead retail analyst at Consumer Edge Research LLC, said in an interview.
The Basquiat was a big sale but there have been very few other nine-figure sales for quite a while. The rest of the May market showed the mid- to low-eight figure range needed to be heavily supported by third party guarantors. These guarantees take a great deal of profit out of the auction house’s commissions. We’ll see some of that when Sotheby’s reports. But the bigger issue is the Fall season and how the sales incentives will effect Sotheby’s ability to earn, as Kazakina rightly gets an analyst to point out:
Sidoti & Co. raised Sotheby’s price target to $62 a share, saying in a July 18 note to clients that the company is in the early stages of its recovery. Successful key auctions in the first half of 2017 “will spur increased confidence among consignors” and drive sales that lift 2018 earnings, according to analyst Greg Pendy.
Public sales are not the only driver of earnings, Christie’s first half results showed that the return of high auction volume was offset by a drop in private sales. If Sotheby’s shows the same sales mix, we might have to doubt the momentum and see the growing auction volume as merely move sales from one side of the house to another.
Another idea behind the stock price is that Sotheby’s has somehow cracked the digital nut. Here’s Kazakina again:
The 273-year-old company “has gone from more old-fashioned to modern, including more information flow between business units and more rapid digital-media work,” Schick said. The company has been also buying back stock.
Schick’s first point is a bit hard to fathom. Sotheby’s last earnings report leaned heavily on broadcasting statistics that suggest great progress in digital marketing. But any close scrutiny of those statements reveal that all of the positive numbers are relative to an extremely low base. There’s really no meaningful evidence—either from Sotheby’s or independently produced—to support Schick’s conclusion that the company has been modernized or that thers is more information flowing between business units.
On the digital media aspect, Sotheby’s video marketing—which is claims attracts viewers more likely to bid—is mostly an expensive mess of irrelevant borrowed interest and bizarre dramatizations of artists or their works of art. This kind of expensive window dressing would do more for the company if the budget line were simply diverted to earnings.
Meanwhile, there are reports that suggest Sotheby’s might be making progress in a realm that is infinitely more meaningful to its earnings growth. Josh Baer reported this week that Allan Schwartzman and Christy MacLear of Sotheby’s AAP division, the company’s most ambitious bet on growth, have each made hires to expand their departments.
A year and a half after buying AAP, the effort seems to be slow in getting started. Neither of the hires seem to be in a position to hit the ground running by adding clients and revenue. So the strategic plan that is more consequential to Sotheby’s growth prospects seems to be slow in developing and tentative in execution.
Finally, the other important issue with Sotheby’s earnings potential completely untouched by Kazakina’s analysts is the movement in Sotheby’s Financial Services, an important contributor to earnings. Jan Prasens, the long-time head of SFS, has received a much-deserved re-assignment to Europe. After a rapid expansion of the loan book two or three years ago, SFS has pulled back slightly.
There are several potential reasons for this retreat. One is simply the lack of quality loan customers in the continuing easy-money environment. Another is the chance that the loan book’s expansion has put pressure on Sotheby’s credit profile. A third is that Sotheby’s CEO, Tad Smith, has decided to revamp SFS entirely under a different sort of leadership as the firm looks for a replacement to Prasens.
The answer to those questions, which probably won’t appear in the quarterly earnings, will have much more to do with the future of Sotheby’s stock than what’s been discussed in the press so far.
Sotheby’s Flirts With Record High (Bloomberg)