Sotheby's: Positive Prospects From Asian Sales Surge

| About: Sotheby's (BID)

Summary

BID’s Q2 2016 revenue came out at $298.67 million, a 38.76% reduction compared to the same quarter last year.

BID posted a net income of $88.96 million in Q2 after post a loss in the last three quarters.

BID’s stock price has gone up 22% since Q2 earnings were released and it’s trading at the higher end of the price target range.

BID’s long-term investors should consider increasing their exposure as their growth strategy would likely to deliver amid strong demand in Asian sales.

Company Overview

Sotheby's (NYSE:BID) history goes back 1744. As an international art business, Sotheby's is extensively involved in art financing as well as operating as an art agency. Sotheby's art financing segment mainly offer financing services, such as offering credit to customers, which are secured by the art pieces. Sotheby's agency mainly acts as a dealer between buyers and sellers of high value fine art pieces, which includes authenticated fine art, collectible jewelry items, decorative pieces and wine selections. Sotheby's agency segment also sells art works acquired at auctions.

There are several operational segments of the company and their activities spans from fine arts, jewelry, wine, to collectible automobiles.

As of August 10, 2016, Sotheby's had a market capitalization of $2.28 billion and employed 1,596 people to run their global operations.

Review of Q2 2016 Financial Results

Figure 1: Sotheby's Generated $298.67 Million Revenue in Q2 2016

On August 8, 2016, Sotheby's released its Q2 2016 financial results, which showed that the company has generated $298.67 million in revenues. Although the Q2 2016 revenue came out 38.76% lower compared to the $487.68 million in the same quarter last year, Sotheby's managed to post a $88.96 million net income in Q2 2016. It is worth noting that Sotheby's had posted three consecutive quarters prior to Q2 2016, where the company lost money.

Since Q2 2015, Sotheby's stock price had fallen to as low as $22.5 per share due to the management's failure to turn a profit. But, in Q2 2016, Sotheby's managed to post a higher net income with a lower revenue compared to Q2 2015, when they managed to generate $72.77 million net income with a $487.68 million revenue.

There were several factors that contributed to this efficiency. First, compared to Q2 2015's $259.38 million Selling, General & Administrative Expenses, the management only spent $120.54 million in Q2 2016. This reduction in SG&A resulted in a very low operating expense of $168.58 million, which is half compared to Q2 2015's $352.82 million operating expense.

Figure 2: Sotheby's Stock Price Showed Strong Bullish Momentum After Posting $88.96 Million Net Income

Hence, investors immediately rewarded the positive results by pushing the stock price to $39.39, which represents a 22.03% increase compared to the closing price of August 5.

Takeaway from Sotheby's CEO's Take During the Earnings Call

During the Q2 earnings call, Thomas Smith, the President and Chief Executive Officer of Sotheby's, mentioned that the adjusted earnings per share was actually a 45% improvement compared to the same quarter last year, if we consider the bullish effect the share repurchases had on the price during the past year.

He sounded rather proud when he mentioned that such repurchase program had "meaningful leverage" and through the ongoing capital allocation process.

Yahoo! Finance pointed out that a jump in Asian art sales was one of the primary reasons why Sotheby's managed to perform well during the last quarter and the CEO of Sotheby's was keen to share that their "aggregate auction sales in Hong Kong in the first half of this year reached $461.5 million, up 22% over the prior year."

He also shared that the "the total number of Asian clients buying western art at Sotheby's grew 12% in the first half of this year," which is showing the interest and increasing purchasing power of their Asian clients.

Mr. Smith outlined that their growth strategy is focused on improving their "position at the high-end of the fine art market" and they managed to achieve two highest prices in this category during their recent London sales.

Sotheby's recent focus on using technology to improve collaboration in order to conduct price sales was also mentioned during the earnings call. Especially, we liked how they released the iOS device apps in an industry that usually shy away from using modern technology to funnel sales.

Although Sotheby's recently appointed CFO, Michael Goss, pointed out that their agency segment experienced a 16% decline in net auction sales, he also gave us some positive news that auction commission margin improved to 16.4% compared to 15.5% in the last year.

Conclusion

If we take a closer look at Sotheby's last five-year revenue history, anyone can come to the conclusion that Sotheby's business is highly seasonal and Q2 and Q4 are the two quarters, when they usually post the highest revenues in the year.

However, it's the demand from Chinese market that helped Sotheby's to execute their growth strategy this year. According to Wall Street Journal, Chinese clients bought more than $1 billion worth of art during the last year and Sotheby's is counting on their Asian market sales to drive growth in the next few quarters.

We believe the management has gotten its acts together after failing to post any profits in the last three quarters, as evident from increased efficiency reflected in their Q2 2016 income statement and they would likely to continue posting profits in the near future.

Sotheby's stock price is now trading at the high end of Capital Cube's estimated range of USD 32.74 to USD 38.88. There is a strong possibility that their stock price will not move further up in the short term, but that should not concern long-term investors.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.