Now that the extended fight with activist investor Dan Loeb is finally over, Sothebys (NYSE:BID) can finally turn its full attention back to running auctions, and based on recent sales of contemporary art at both Sothebys and Christie Group plc (LON:CTG), there is a lot of room for growth.
Impressionism of growing importance, Christie’s auction sets a new record
While Sothebys (NYSE:BID) recent sale of impressionist paintings was a bit disappointing, its contemporary sale brought in $364 million against an estimated range of $337 million to $474 million, with 85% sell through and more than half of the paintings selling for more than their high estimates. Christie Group plc (LON:CTG)’s recent sale of post-war and contemporary art was an even bigger hit, setting new records with a $744.8 million haul, smashing the $500 million estimates going into the auction. Asian investors played a more prominent role in both company’s auctions than they have in the past, and Latin American participation was also up for Sothebys.
Sothebys (NYSE:BID) next big auction is an impressionist and modern art sale including Amedeo Modigliani’s Portrait of Paul Alexandre, Picasso’s The Artist and his Model, and Joan Miró’s Bird Figure on June 4.
Chen improves Sothebys’ revenue 54%, still needs to work on margins
“We remain encouraged on BID’s impressive sales performance in Q1,” writes Citi analyst Oliver Chen, who rates Sothebys a Buy with a $55 price target. “We believe a broader BOD perspective will help expedite cost saving strategies over time,” referring of course to the recent addition of Loeb and two of his nominees to the Sothebys (NYSE:BID) board of directors.
Sothebys (NYSE:BID) total revenue was up 54.1%, auction agency sales were up 40%, and consolidates sales grew 32%. Commission margins were a weak spot, reaching 14.3% compared to Chen’s estimated 15%, but operating margin was 21.9% compared to -20.9% last year, and more cost cutting measures could bring margins in line with Chen’s expectations.
The $55 price target is based on 17x 2015E EPS, which is a slight discount to Sothebys (NYSE:BID) two-year average valuation of 18x. Art auctions are always fairly risky: supply can dry up unexpectedly, macro conditions can make art an unattractive asset, and there can be knock on effects from headwinds in other asset classes. Chen also notes that Sothebys stock price could suffer if the auction house doesn’t manage to execute in Asia, all of which caused him to apply a slightly lower valuation.
