Sotheby's: Bid With Caution

| About: Sotheby's (BID)

Sothebys (NYSE:BID), the auctioneer of fine arts and high end collections, fell 9% after announcing its fourth-quarter results, which came in at the low end of expectations. The final quarter of the year is the most important. In 2011 Sothebys generated 34% of its annual revenue and 41% of its income, during the last three months of the year.
Shares, which ironically trade under the symbol BID on the New York Stock Exchange failed to find any buyers in Thursday's trading session.

Volatile business
Just like the business itself, the shares of Sothebys are notoriously volatile. Shares boomed to $50 in 2007, when the world economy, art prices and auction fees where booming. A year later shares have lost almost 90% and traded for mere $6.
A global economic recovery and strong Asian demand spurred a recovery in Sothebys shares. In 2011 shares reached the former peak of $50 again.

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Fourth-quarter results
Sales for the final quarter of 2011 fell 11% on a yearly basis to $284 million. Net income fell 26% to $71 million or $1.05 per share on a combination of higher costs and lower revenue as Sothebys continues to invest in its online business and expansion in China.
For the whole year of 2011 revenue rose 7% to $832 million. Profits rose 7% as well to $161 million or $2.52 per share.
The board of directors decided to raise the quarterly dividend from $0.05 to $0.08 per share, which seems a vote of confidence toward the future. However as recently as 2008, the company still paid $0.15 per quarter.

Investment thesis
2011 was the second best year in the 268-year history of Sothebys.
After generating record revenue of $918 million in 2007, the company reported negative revenue growth in the subsequent two years. Margins collapsed from a record 23% to a small loss in 2009.
In 2010 revenue and profits recovered and the growth continued in 2011, although at a slower pace. At this point in time the future looks bright with continued Asian demand, but historically we are near the peak. Net margins have expanded to record levels of 20%.

With revenue and margins near historic highs, there is little room to the upside. Shares valued at 14 times earnings, and paying a mere 0.7% seem to have more downside potential. The disappointing fourth-quarter results might be the first signs of a renewed slowdown in the art industry.

Like many of its auctioned items, it might be difficult to put the right price on an object, so I'll stay away from BID in the near term.

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