Sotheby's (BID) stock price is volatile, as can be seem from its performance over the last few years. From trading around $57 in 2007, it dropped to $6 in 2008, only to again reach $52 in 2011. It currently trades at $31 and is down 11.6% over the last month. The company missed analyst estimates for EPS as well as revenues in its latest Q2 2012 results. This is the fourth consecutive quarter with earnings misses. In the near term, the stock does not look attractive due to the economy, but over the long run, we are bullish on BID.
The company reported EPS of $1.24, which missed estimates of $1.49. Last year, the Q2 EPS was $1.81, which means a decline of 31%. Revenues of $304 million were down 18% (YOY) and missed estimates of $336 million.
The company primarily blamed the economy for the lackluster performance this quarter. The company has a high beta of 2.36. The economic slowdown in Asia (primarily China) and weak European demand are a cause of worry for the company, as many other luxury retailers have also given cautious comments on business from these geographical areas. The company said that the high-end of the market is still strong, despite the economy, and that the Asian market is still very profitable.
The company's revenue comes from auctions, dealing and lending against artworks. Some 95% of total revenues came from auctions in Q2 2012. The revenue from auction commissions was down because of a $250 million decline in single owner sales, as compared to a record quarter last year. Auction commissions were also down by about 1 percentage point owing to competition to get more lucrative deals, and due to sales mix. Lending revenues performed the best with a 44% jump in revenues, showing that owners are increasingly relying on artwork for liquidity purposes. Private sales of $40 million in 1H 2012 are stable and healthy. Operating expenses were down 8% in Q2 and 3% overall for 1H 2012.
Owing to low interest rates, the management is considering re-financing of convertible notes and more costly senior notes with lower interest rate debt. One such step is the pricing of its $300 million senior unsecured notes with maturity in 2022 and interest rate of 5.25% to replace the 7.75% senior notes due in 2015.
With $8 cash per share, the company might consider dividend increases and stock repurchases if liquidity remains strong. Currently, the company pays a quarterly dividend of $0.08/share. This means a dividend yield of 1.1% with a pay ratio of 16%. The dividend is sustainable at the moment because of cash on hand. However, the free cash flow yield (trailing twelve months) is only 0.4%.
Overall, the company's trailing twelve month gross margin, operating margin and net profit margin are better than their 5-year averages, which shows that the company can handle short-term tough business scenarios well, and is good for long-term investments.
The mean price target is $34. At a forward P/E of 14x and expected EPS of $2.22 for 2013, the price comes out to be $31, with $41 being the 52-week high. The company's peers, Christie's and Phillips, de Pury & Company are privately held, and hence their multiples cannot be used for comparison. Analysts are expecting an 18% increase per annum in earnings over the next 5 years.
The company is one of the leading auction houses and will be a good buy on an economic recovery, and when the business from Asia and Europe picks up.