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Can Sotheby's Earnings Survive a Sales Decline?

By Dan Caplinger – Jul 21, 2016 at 1:28PM

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The auction house is dealing with a volatile market for art sales, but efficiency gains could help Sotheby's bottom line.


Image source: Sotheby's.

The art market can be extremely volatile, and auction house stalwart Sotheby's (BID) has seen plenty of favorable and unfavorable periods for sales of high-priced art and collectibles in its long history. Recently, the luxury retail market has been on a downswing, and that has worked its way through even to the highest end of the art auction world. Coming into its second-quarter financial report in early August, Sotheby's investors are expecting a sizable decline in revenue, but they want evidence that the auction house can preserve its bottom line despite poor industry conditions. Let's take a look at the latest from Sotheby's and whether it can buck adverse trends in its market.

Stats on Sotheby's

Expected EPS Growth

1%

Expected Revenue Growth

(12.3%)

Trailing Earnings Multiple

14.6

Expected 5-Year Growth Rate

15%

Data source: Yahoo! Finance.

Can Sotheby's earnings hold up?

In recent months, investors have been somewhat downbeat about Sotheby's earnings, cutting their second-quarter projections by about 3% and making small reductions to their full-year 2016 and 2017 estimates as well. The stock has made some headway higher, rising 7% since mid-April.

Sotheby's first-quarter report once again reminded investors of the difficulties that the company has had to overcome. Revenue plunged by nearly a third, and the company posted a sizable net loss, reversing profits in the year-earlier quarter. Net auction sales fell by 35%, and Sotheby's said that part of the reason why the results looked so bad was that the first quarter of 2015 had been extraordinarily strong. Nevertheless, CEO Tad Smith did note that the company had predicted the slowdown, and he pointed to early second-quarter events that had gone well as a potential sign of changing circumstances for the industry.

However, some signs of weakness persisted into the second quarter. In late June, Sotheby's failed to find a buyer for a diamond sized at more than 1,100 carats. Known as the Lesedi la Rona, pre-auction estimates were $25 million higher than the eventual high bid, and because the seller's reserve price was above that bid, the diamond went unsold. Similar problems at rival Christie's came in the wake of the U.K. Brexit vote and its impact on the foreign exchange markets, and one client chose to withdraw a painting that had been expected to bring in as much as $20 million before financial market volatility riled the art world.

Sotheby's looks to recover and grow

Nevertheless, some things have gone well for Sotheby's. The company's Asia unit said that auction sales for the first half of 2016 jumped 22% from the same period in 2015, and company representatives have noted that Asian collectors are having a positive impact not just within the region but throughout the worldwide market for art and collectibles. The unit claimed collectors from 65 different countries, and nearly a quarter of buyers were first-time clients of Sotheby's.

Yet pressure throughout the industry will likely hurt Sotheby's. Christie's reported that first-half art auction sales were down by three-eighths this year, and private brokered art sales have also fallen. Early numbers from Sotheby's point to a 25% drop in art auction proceeds through June 30, even though the auction house said that online bidding has become more common.

Looking forward, one key event will be the sale of the private art collection of recently deceased music legend David Bowie. Sotheby's won't auction off the collection until early November, but in the interim, the art works will be shown in London, New York, Los Angeles, and Hong Kong. Given the international reputation that Bowie has in the music world, it's likely that the sale will not only be successful in its own right but also spur further interest in similar collections in the future.

In the Sotheby's report, investors will want to focus on strategies that the auction house develops to try to reverse the downward trend in the art world. By looking at unconventional ways to boost business and get things moving in the right direction again, Sotheby's will have a better chance at weathering the downturn intact and taking market share away from Christie's and other high-end auction specialists.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Sotheby's. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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