Kurt Rive's  Instablog

Sotheby’s stock (Ticker: BID, NYSE) has been on a tear lately.  The shares have more than doubled since their intraday low of $6.05 on February 27^th and are up 61% so far this year, easily outpacing the S&P 500’s 1.54% gain for the same period. 

All eyes were on the storied auction house Wednesday as it held its Evening Sale of Impressionist and Modern Art in London.  The auction saw 23 of 27 lots find buyers and brought in a little over £33.5 million.  The evening was quickly deemed a success by Sotheby’s as it comfortably met pre-sale expectations.  However, it was still a far cry from last year’s sale which raised £102.2 million.  The international art market, while seemingly alive and fairly stable, is still firmly in a period of relative restraint with fewer lots for offer and lower hammer prices.  Judging by its recent stock performance, perhaps an “alive and fairly stable” trend in auctions is all the encouragement investors need to pile back into Sotheby’s. 

Earlier this year, it was revealed that S.A.C. Capital, headed by Steven Cohen, the billionaire hedge-fund manager and owner of one of the most expensive art collections in the world that includes Damien Hirst’s The Physical Impossibility of Death in the Mind of Someone Living (a sculpture commonly referred to as the “pickled shark”), amassed a 5.9% stake in Sotheby’s in the six months ending March 31^st.

S.A.C. Capital is not the only hedge fund interested in Sotheby’s.  Atticus Capital recently disclosed a 5.4% stake in the company.  Atticus is mostly known for its expertise in the commodities sector.  Resurgence in the commodities space will enrich some of Sotheby’s vital international clients including the Russian oligarchs.

Due to the seasonality of the business, the first and third quarter results at Sotheby’s usually reflect a net loss.   Indeed, a net loss of $0.53/share was booked for the first quarter of this year (compared to a net loss of $0.19/share for the prior period).  Net auction sales were down an astounding 71%.  However, the capable William F. Ruprecht has done an admirable job in preparing the company for the economic downturn.  The company’s two-phase restructuring plan and cost saving initiatives appear to be paying off.  Expenses were slashed by 25% and auction commission margin improved 41%.  Auction commission margins should continue to show strength for the rest of the year because margins are typically higher for lower value works. 

Management expects aggregate cost savings of $160 million for 2009 versus 2008.  This should help offset what is sure to be a string of pretty dismal quarters.   The shares have had an incredible run but are still well below their 52-week high of $28.98, having closed at $14.51 on Friday.  Given this move, investors may be wise to let them cool down before bidding.

Disclosure: No positions