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Introduction

Sotheby's (NYSE:BID) is an auctioneer of authenticated fine and decorative art, jewelry and collectibles. The company did $5B in auction sales of the two major auction houses within the global auction market. Sotheby's sells 51% of the total aggregate auction sales of the two major auction houses within the global auction market. Sotheby's is trading at valuations that exceed my price forecast. Therefore I believe the stock should be sold short.

Qualitative Analysis

Sotheby's operations are organized under three segments: Auction, Finance, and Dealer.

Sotheby's role as auctioneer is to represent sellers of artworks by accepting property on consignment (basically selling on behalf of someone, without owning the merchandise), and by matching sellers to buyers through the auction process. Sotheby's than charges a commission to both the buyer and seller (calling it seller's commission, and auction commission revenue), the commission is a percentage of the sale price at auction. This broker model represents 80-86% of revenues for the past 3 years. Meaning this is Sotheby's primary form of revenue.

Upside catalysts include improvements in consumer spending, and increases in wealth among the high net worth consumers.

Downside catalysts include slow-down in global economic growth, and diminishing stock values.

Technical Analysis

Sotheby's has been on a continuous down-trend when analyzing the multi-year trend. However the stock has found some solid support at around $28.00 per share. With the broader stock market rallying, BID caught a bit of the good fortune by following the market rally.

(click to enlarge)

Source: Chart from freestockchart.com

In December the stock broke the symmetrical triangle formation. It has been above the symmetrical triangle formation for 4 trading sessions, but what lies right above the symmetrical triangle is the 200-day MA at 33.50. I don't anticipate BID to break out from the 200-day MA, rather I anticipate BID to pivot from the 200-day MA, and trend lower throughout 2013.

Notable support is 30.50, 28.50, and 26.50 per share. Notable resistance is 33.50 per share. I anticipate the stock to decline from current levels ($32.58 per share).

Street Assessment

Analysts on a consensus basis have strong expectations for the company going forward.

Growth Est

BID

Industry

Sector

S&P 500

Current Qtr.

1.00%

43.50%

9.60%

8.30%

Next Qtr.

6.30%

54.70%

10.20%

14.80%

This Year

-31.70%

13.80%

5.00%

5.60%

Next Year

25.60%

18.40%

5.40%

13.20%

Past 5 Years (per annum)

4.01%

N/A

N/A

N/A

Next 5 Years (per annum)

18.00%

11.79%

14.14%

9.14%

Price/Earnings (avg. for comparison categories)

19.39

-152.52

-26.3

13.71

PEG Ratio (avg. for comparison categories)

1.08

-4.19

-0.33

-0.01

Source: Table and data from Yahoo finance

The company shows reasonable growth as analysts on a consensus basis have a 5-year average growth rate forecast of 18% (based on the above table).

Earnings History

11-Dec

12-Mar

12-Jun

12-Sep

EPS Est

1.25

-0.16

1.49

-0.49

EPS Actual

1.04

-0.16

1.24

-0.48

Difference

-0.21

0

-0.25

0.01

Surprise %

-16.80%

0.00%

-16.80%

2.00%

Source: Table and data from Yahoo finance

The average surprise percentage is -8% analyst forecasted earnings over the past four quarters (based on above table). The company delivers a trend of missing expectations, implying weakness in future growth.

Forecast and History

Year

Basic EPS

P/E Multiple

2006

$ 1.77

15.84

2007

$ 3.34

10.44

2008

$ 0.44

19.11

2009

$ (0.10)

-

2010

$ 2.37

18.68

2011

$ 2.52

11.21

Source: Table created by Alex Cho, data from shareholder annual report, and price history is from Yahoo finance.

The EPS figure shows that throughout the 2007-2011 period revenue growth slowed as the company was adversely affected by the great recession. Once the United States economy exited the recession in 2010-2011 company earnings have improved.

(click to enlarge)

Source: Table created by Alex Cho, data from shareholder annual report

By observing the chart we can conclude that the business is cyclical and is affected by macroeconomics. Therefore the largest risk factor for Sotheby's is the slowing of international gross domestic product growth and decline in individual wealth. As as long as the world economy continues to grow, earnings are likely to grow.

(click to enlarge)

Source: Forecast and table by Alex Cho

By 2016 I anticipate the company to generate $3.10 in earnings per share. This is because of earnings growth, improving global outlook, and the continued success of their product offerings. The forecast is proprietary, and below is a non-linear chart indicating the price of the stock over the next 5-years.

(click to enlarge)

Source: Forecast and chart by Alex Cho

Investment Strategy

BID currently trades at 32.58. I am a pessimist. I have a price forecast of $22.83 for 2012. Being that there are only 16 days before the end of 2012, it may not necessarily hit that price target due to the short time frame. This means we should move to the long-run, and focus on 2012-2013. In 1st quarter 2013, Sotheby's will announce earnings for 4th quarter 2012. I have seen a recent trend of BID missing earnings expectations and this should harm investor sentiment. If the company misses earnings growth estimates, it is likely that the company will be slapped with some severe downgrades.

Short Term

Over the next several months, the stock is likely to depreciate from $32.58 to $22.83-$26.62. This implies 18-30% downside from current levels. The technical analysis indicates resistance and a continuation of a down-trend. The price forecast and technical analysis indicates that traders should short at $32.58 and to cover at $26.62-22.83 per share. There is notable support at $30.50, $28.50, and $26.50 per share. It is likely that the stock will experience rallies at each level throughout the 2012-2013 period

Investors should buy to cover BID below $26.62 per share to pocket short-term gains in 2013.

Long Term

The company is a mediocre long-term investment. I anticipate BID to deliver upon the price and earnings forecast despite the risk factors (global economic slowdown). Sotheby's primary upside catalyst is economic growth, and improving wealth. I anticipate the company to deliver upon my forecasted price target of $42.17 by 2016. This implies a return of 29% by 2016. This rate of return is less than stellar and it is likely that investors would generate much larger returns buying index funds.

Conclusion

Sotheby's is a great short-term sell-short opportunity. I anticipate the stock to fall in price due to both technical and fundamental factors. The stock is likely to grow long-term, but it is not worth risking capital buying a company that will generate yields below the market rate of return (12%). The solution is simple: sell Sotheby's.

Source: Going Once! Going Twice! Sotheby's Should Sell Off