Who knows if it’s the specter of higher taxes, a stumbling stock market or bond yields paying essentially nothing, but something is making the wealthy get back to opening their checkbooks for fine art. On Tuesday, 268-year-old Sotheby’s (NYSE:BID) set a company record by selling $375 million of it.
A painting by Mark Rothko fetched $75 million, a Jackson Pollock went for $40 million, a piece by Francis Bacon sold for nearly $30 million and a Willem de Kooning went for almost $20 million. Ring it all up and the total value of all the works auctioned off Tuesday night amounted to a fifth of Sotheby’s market capitalization.
If only the market thought as much of Sotheby’s stock as the ultra-rich do its high-priced auctions.
Shares still shrugged in Wednesday trading, leaving the stock down 8% over the last year to sit only about three bucks above its 52-week low of $26.19.
The most interesting issue for the company is that huge, record-blasting auctions like the one Sotheby’s enjoyed Tuesday aren’t really all that great for the bottom line. Indeed, that was part of the reasoning behind Williams Capital Group slashing its rating on Sotheby’s to “sell” from “hold” a few months back.
“Works of art over $1 million have lower margins (12%) than works below $1 million (20%-25%),” said analyst Marc Riddick in an August note to clients. “The art market has seen faster growth in higher priced works, so auction margins can decline naturally.”
And, in a prescient bit of commentary given the latest blockbuster auction, Riddick noted that “collectors appear to be more focused on the high-end, while less expensive works are increasingly going unsold.”
Of the 58 lots sold by Sotheby’s on Tuesday, only 15 went for less than $1 million.
On top of that, competition from privately held competitor Christie’s is intense. And as big as Sotheby’s rebound has been from the depths of the financial crisis and recession, its results have too often come up short of Wall Street’s forecasts.
In 2011, Sotheby’s reported net income of $171.4 million on revenue of $831.8 million — a big reversal from a net loss of $6.5 million on $485 million in revenue back in 2009.
But expectations matter a lot on Wall Street and, while the company beat estimates in the most recent period (with a narrower-than-expected loss), that only broke a streak of four consecutive quarterly misses. Revenue, meanwhile, has come down to a flip of a coin, as Sotheby’s missed analysts’ average estimates in two of the last four quarters.
Plus, the global art market is up against very tough comparisons with 2011. “Sotheby’s has already reported meaningful sales declines in the first half of 2012 due to fewer auctions and lower auction sales,” Riddick noted in his downgrade. “We have no reason to believe that the marketplace is going to improve in the near-term.”
It is rather ominous that Sotheby’s record-breaking auction failed to move the needle on the stock Wednesday. The bidders might have come out for the Rothko, but they sure didn’t show up for the shares. The boffo headlines didn’t even set of a short squeeze in this heavily-shorted name. That says something troubling about Sotheby’s prospects.
True, the stock certainly appears cheap, trading at discount of about 30% to its own five-year average on a trailing earnings basis (P/E) and a 46% discount by five-year average forward earnings, according to data from Thomson Reuters Stock Reports.
But sometimes stocks are cheap for a reason, and I’m not going to quibble with the market on this one.
As of this writing, Dan Burrows did not hold positions in any of the aforementioned securities.