This commentary on the press reaction to Sotheby’s earnings report is available to AMMpro subscribers. Monthly subscriptions come with a free first month grace period. Subscribers are welcome to sign up for the service and cancel at any time before they are billed.
Update: Since this analysis was published, Sotheby’s stock (BID) has broken through the $50 floor that had previously been a ceiling for the stock price. Today it suffered further even as the broader market went up. It was also revealed in Marcato Capital’s 13F filing released today that the activist hedge fund is now down to a small ownership stake below 2% of the shares. Marcato owned 6.6m shares at its height and is now down to 860k, down some 80+%.
There’s a lot to say about Sotheby’s most recent earnings call. In the week of trading since Sotheby’s released its second quarter earnings, the stock has dropped a full 10%, the classic market definition of a correction. In another post, we will look closely at Sotheby’s earnings and what the current quarter and six-month reporting suggests about whether this is an actual correction of a stock that got a little ahead of itself before, eventually, proceeding higher or a peak of unsustainable momentum.
As the chart above shows, even with the 10% correction, Sotheby’s stock price remains 25% higher than before the February earnings call. What BID gave back the week after the flat numbers came back was excessive enthusiasm. The stock first took off in late February after the Q4 earnings announcement and its strong increase in commission margins. The stock had previously seen its value cut in half on earlier earnings call where it the then-CFO warned 2015’s fourth quarter would see greatly diminished auction margins due to the conditions of the Taubman sale.
Starting at $40, the same point where CEO Tad Smith had joined the firm in 2015, BID advanced to nearly $48, a price slightly above the top tick achieved under Smith’s leadership. During the May conference call, Sotheby’s offered a number of metrics meant to show real progress in its efforts to transform the company digitally. Sell-side analysts bought into management’s vision of the company and the stock rose further as the Spring auction season made headlines for Sotheby’s team.
Anticipating more progress, analysts spoke up for management as reporters sniffed around the stock’s multi-year high price. Everything seemed to portend further momentum. But when the earnings report showed flat sales and rising expenses, the share price dropped to a $50 floor. The good news for Sotheby’s management, who were brought in by activist investors to reset the share price substantially higher, the $50 floor held not once but twice, eventually showing the floor’s durability on a down day of overall trading for the market. (See the chart above) How long that floor will hold is anyone’s guess.
Before the May earnings, $50 had provided resistance in the stock. The active buying you can see on the morning of Aug 3rd after the shares opened lower; again, that evening; and on Monday, suggests there are buyers looking to add to their positions at these levels. The much lighter trading volume on Wednesday, August 9th suggests few holders are throwing in the towel either.
The analysts may have gotten BID wrong in the short run; however, owners still believe there’s a story here that will still play out over the long term. In a later post, we’ll try to explain why we see this last earnings report as the end of the beginning at Sotheby’s. In the meantime, let’s look at the last 4+yrs of the stock’s trading history so we have good sense in our minds of the timeline of the beginning.
The chart above shows the price of BID in late February of 2013 just before Mick McGuire’s Marcato Capital acquired a substantial stake in the company and mounted a public campaign for board representation, a stock buyback and for the auction house to sell some of its real estate to return capital to shareholders. McGuire would eventually be joined, and then exceeded in ownership, by Daniel Loeb’s Third Point and a number of other activist investors riding their coattails. As the stock rose to $56, many of those activists were happy to take their profits as Loeb engaged in a somewhat bitter fight with Sotheby’s management.
In the end, Loeb won and Sotheby’s CEO stepped down at the end of 2014. Unfortunately for Loeb and McGuire, although the company had agreed to a substantial stock buyback, and the new CEO saw that it was increased to $320m, Sotheby’s ran into the misfortune of over-guaranteeing Alfred Taubman’s estate which eventually put the stock price at a multi-year low of $20. That dramatically changed the narrative for Sotheby’s.
Smith announced the acquisition of Art Agency, Partners which would end up bringing three persons into essential roles in the company. But the stock continued to fall. Steven Cohen, who had previously bought a secondary offering during the financial crisis, appeared again as a 5% owner of the company. Eventually, Taikang Life Insurance Company quietly amassed a 13.5% stake in the auction house over the course of a month of buying that only moved the stock price slightly.
When Taikang’s stake was announced and Sotheby’s subsequently negotiated a standstill agreement in exchange for a board seat, the stock responded to both the show of confidence and the implicit collar a strategic owner’s presence announced. Nonetheless, the stock’s ceiling remained the $40 mark, the same number the stock traded at when new management arrived. By this time, Steven Cohen had sold his stake further signaling the stock’s return to health.
Loeb continues to stay invested in Sotheby’s, a surprising long-term participation by the hedge fund manager. Highlighting the pressure to see a return, Marcato was forced to trim its stake both in the public markets and in a sale of a substantial portion of its ownership stake back to the Sotheby’s. For McGuire, even though he eventually got the bulk of his demands met, he most likely got out of Sotheby’s stock without much in the way of profit. Tying up capital for four years without a solid return is very hard for a hedge fund. Performance pressures dictate investments more than long term faith.
It was almost as if McGuire’s near capitulation on BID in October of 2016 (he still holds a meaningful but not large stake) unleashed the stock’s performance. The first reaction came after Sotheby’s release 2016’s Q4 earnings showing real progress on commission margins. The next quarter’s numbers had little directional information (Sotheby’s makes the bulk of its sales in two quarters, leaving two fallow earnings for the CFO to tap dance through.) Instead, Sotheby’s filled their earnings call with slew of numbers suggesting substantial “digital” progress. The press and analyst community fall too easily for the idea that the art market is under-digitized and ripe for ‘disruption.’
Sotheby’s played upon that receptive audience, perhaps too well. The stock and analyst’s chatter repeated the comparative claims Sotheby’s issued. It seemed to work well … especially when Sotheby’s was making headlines with a massive, unexpected win in the May marquee sales. But last week’s earnings revealed that whatever digital progress the company may or may not have made (and we’ll address that in a separate post,) the effects were not dropping to the bottom line.
Even though Sotheby’s stock pulled back to $50, and could fall further in a down market, the important psychological barrier on $50 was broken with the stock. If Sotheby’s can consolidate around the $50 number, pull off another big win in the Fall and demonstrate to investors that it can continue to improve on earnings, there’s a good chance it might get above its historic range some time in the next few years.
