Sotheby's: Fine Art of the Auction

| About: Sotheby's (BID)

Investopedia Advisor submits: Sotheby’s is one of the most prestigious fine art auction houses in the world, and the only one whose shares themselves can be bid for on that other well-attended auction room know as the New York Stock Exchange.

The market for fine art, decorative art and collectibles has been on a tear over the last couple of years, as the explosion in personal wealth worldwide is bringing a whole new set of buyers into the market. Auctioneers like Sotheby’s, whose earnings are primarily generated from sales commissions and fees for such things as appraisals, should continue to benefit not only from the higher turnover this generates, but from the positive impact new demand has on valuations.

Take fine art, for example. After gaining 18% in 2004, prices for fine art in the New York market shot up by 41% in 2005 and show no signs of slowing down so far this year. After generating losses during 2002 and 2003 (following the dotcom crash-induced art market slump in 2001), earnings rebounded in 2004 and 2005 with basic EPS exceeding US $1.00 in each of those years.

So far this year, results have been even more impressive. Strong auction results boosted revenues for the first half of 2006 by 36%, prompting a more than doubling of net income and EPS – which came to US $1.14 for the period. Encouraged by this dramatic improvement in performance, Sotheby’s Board announced that after a six-year hiatus, it was resuming dividend payments at an annual rate of US $0.40 per share.

Obviously, all this good news has not gone un-noticed by the market. So far this year, Sotheby’s shares have gained more than 66%. However, despite the rise in price, the shares still appear to offer value. While the stock trades at a forward P/E of 16.7x, a number somewhat higher than the current forward P/E of 15.4x for the S&P 500, this modest premium appears more than justified. The company’s earnings should grow in the range of 15-17% per annum over the long-term compared with 12% for the market as a whole.

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By Eugene Bukoveczky, Contributor - Investopedia Advisor

At the time of release Eugene Bukoveczky did not own any shares in any of the companies mentioned in this article.