Sotheby’s (BID) is a stock that shouldn’t be on a value investor’s radar.
The recent market downturn has suddenly pushed it into “value” territory as its forward P/E has now dropped to 14.9. That is just under the cut-off level of 15x I use for value stocks.
Sotheby’s is the auction house that specializes in art auction, private sales and art-related financing activities. It operates in 40 countries and has salesrooms in New York, London, Hong Kong and Paris.
Sotheby’s Beat By 84.2% in the First Quarter
As the global economy has improved, so has Sotheby’s business as the art world re-awakened from its 2009 recession.
On May 6, the company reported first quarter results which were much better than the consensus. Earnings per share were a loss of just 3 cents compared to an expected loss of 19 cents.
Revenue jumped 87% to $101.9 million mainly due to a 117% increase in auction commission revenue from the prior period. This increase in auction commission revenue was driven by the strong Impressionist and Contemporary Art net auction sales results in London in February, which rose $208.1 million, or 243%, from the prior year.
Are the rich buying art again? You bet.
“The renewed art market momentum that began last autumn continued into the first quarter and we are delighted with our results,” said Bill Ruprecht, President and CEO.
“The quarter saw an impressive increase in revenues and at the same time, a decrease in operating expenses, leading to a material improvement to our bottom line,” he added.
The first quarter is not, historically, Sotheby’s strongest quarter. It represents only about 7% to 15% of its annual auction sales and it usually sees a loss in this quarter.
Sotheby’s urges investors to use 6 or 12 month results as a better indicator of the company’s performance.
The Zacks Consensus Estimates Rise
The company did not provide second quarter guidance but given the company’s big beat in the first quarter, it is not surprising that they raised estimates for the second quarter and the full year.
Second quarter estimates climbed 24 cents in the last 60 days to $1.00 and is also up 2 cents in the last 30 days as 1 estimate was revised higher during that time.
1 estimate has also moved higher for the full year in the last month but the 2010 Zacks Consensus has remained unchanged at $1.54 for the last 60 days. That is up 46 cents in the last 2 months.
Given that the company only made 4 cents for the entire year in 2009, there has obviously been a big turnaround in earnings.
But what happens going forward as the stock market softens and there are jitters about the global recovery?
Analysts are still bullish about 2011, projecting earnings growth of 19%. We’ll have to wait and see what the company reports for the second quarter on Aug 10 to see if those estimates will change.
The 2-Year Chart
Sotheby’s had an amazing run off the 2009 lows but it’s been faltering sharply in recent weeks. This downdraft is what has enabled it to move into the ranks of a value stock.
Value Fundamentals
In addition to having a P/E of 14.9, the stock also has a price-to-book ratio of 2.8, which is under the value parameter of 3.
Sotheby’s has an outstanding 5-year average return on equity (ROE) of 25.7% but that also included the hey-day before the recession.
In the last year, the ROE has shrunk to just 5.4%. We’ll have to see if that rebounds now that the global recovery is underway.
Sotheby’s is a Zacks #1 Rank (strong buy) stock.
Tracey Ryniec is the Value Stock Strategist for Zacks.com. She is also the Editor in charge of the market-beating Zacks Value Trader service.
