Should You Place a Bid on this Company?

Sotheby's (NYSE: BID  ) stock has appreciated 59% over the last year. Investors are excited about its future potential for one primary reason: overseas growth. However, "potential" can be a dangerous word

The Excitement Driver
Sotheby's cited some interesting and exciting stats on its recent 10-Q:

  • Sold lots purchased by buyers from new markets in 2008: 21%
  • Sold lots purchased by buyers from new markets today: 39%

This, of course, indicates growing demand in overseas markets. Another stat further confirms this trend:

  • Percentage of first-time buyers in Sotheby's worldwide spring sales from Asia: 22%

Sotheby's doesn't like to think of itself as an auction house anymore. Instead, it refers to itself as a pioneering global art business. The word "global" might be especially enticing to buyers, simply because it opens up a whole new world for Sotheby's to explore. 

Sotheby's is seeing the greatest demand in China and the Middle East. Additionally, Sotheby's is only in the early stages of its digital potential. It now offers a platform where clients can transact any time, from anywhere, and on any device.

Recent Results and Events
In the first half of the year, total revenue came in flat year over year at $406.6 million. Auction commission buyer's premium rate increased on March 15, but seller's margins contracted due to competition for high-value consignments. First-half expenses increased 5%, which negatively affected the bottom line. Sotheby's defends this sacrifice, claiming it was necessary in order to invest in digital media and emerging market expansion for the long haul.

Note that CFO William Sheridan will be stepping down, due to pressure from activist investors who want the company to do more for shareholders. Sotheby's stated that it will review what it can do for its shareholders early next year. The potential for Sotheby's via emerging markets and digital expansion is evident, but history tends to repeat itself. Sotheby's is far from the safest long-term investment in the auction space, primarily due to the company's inability to deliver consistent bottom-line growth.

A Better Bid
If you're looking for consistent bottom-line growth in the auction space, then you might have trouble deciphering the best option from the chart below:

BID EPS Diluted TTM Chart

BID EPS Diluted TTM data by YCharts

While Sotheby's has reported losses in two of its last four quarters, Liquidity Services (NASDAQ: LQDT  ) and eBay (NASDAQ: EBAY  )  consistently show profits.

Sotheby's also lags Liquidity Services and eBay on the top line:

BID Revenue TTM Chart

BID Revenue TTM data by YCharts

Liquidity Services is an auction marketplace for surplus, salvage, and scrap assets. It was ranked #48 by Fortune for the "Fastest Growing U.S. Companies." Furthermore, Liquidity Services has 6,000+ clients and 2.4 million buyers worldwide. The only negative is lowered bottom-line guidance.

As far as eBay is concerned, while it's best known for its Marketplace, the popularity of mobile devices has increased usage and potential for PayPal. Also, PayPal is slowly working its way into retail stores as a payment option. The brilliance of PayPal is its simplicity; consumers love simplicity.

Let's take a look at some key metric comparisons for these three companies:

 

Forward P/E

Net Margin

ROE

Dividend Yield

Debt-to-Equity Ratio

Sotheby's

23

13.43%

10.21%

0.80%

0.50

Liquidity Services

17

7.26%

13.64%

N/A

0.00

eBay

18

17.73%

13.14%

N/A

0.21

All three companies are fundamentally sound. However, if you combine these fundamentals with top and bottom-line performances covered above, and then add the "deepest pockets" factor, which has the potential to lead to inorganic growth and returned capital to shareholders, eBay is the clear winner.

The bottom line

Sotheby's has potential to grow via geographic and digital expansion, but it has had difficulty delivering consistent profits, and it's highly sensitive to art market trends. If you would prefer to invest in an auction-focused company that isn't as cyclical and still offers growth potential, consider eBay. 

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