Overview: Sotheby’s, together with its subsidiaries, operates as an auctioneer of fine and decorative art, jewelry, and collectibles primarily in the United States, the United Kingdom, China, and France. The company operates in three segments: Auction, Finance, and Dealer.
Valuation: Sotheby’s has more than quintupled off its lows of the market nadir of March 2009. It trades at approximately 35 times this fiscal year’s consensus earnings of 95 cents a share and 25 times next year’s consensus earnings of $1.42. It also trades at 4.5 trailing revenues and a five year high of price to cash flow and 4 times book value. It had negative operating cash flow in 2007 and 2008.
Key Red Flags:We are concerned for several reasons about the near term prospects for stock price appreciation for BID:
1. This has been a very cyclical stock over the last six years. It has had earnings ranging from $3.25 in 2007 to a negative 10 cents in 2009. 35 times projected earnings and/or 10 times peak earnings seem like an excessive amount to pay for a stock with this type of earnings variance.
2. Insiders have sold approximately 40% of their total shares over the last six months
3. The stock is selling for 25 times its average earnings over the previous six fiscal years
Technical outlook: BID is trading over 40% its 200 day moving average
Price Target: Given the cyclical nature of this company’s business model, 12-15 times next year’s earnings of $1.42 seem like a more reasonable valuation. Price target of $17-$22.
Conservative to Medium risk investors: Avoid
High Risk investors: Short
Very aggressive traders: Sell Jan 11 35 naked calls at $4.50.
Disclosure: Short BID