Second-quarter results were impressive - revenues were up 39% to $248 million, and net income was up 68% to $71.5 million. Results were driven by a series of highly successful auctions in New York and London with sales exceeding their high estimates, crowned with the sale of Picasso's "Dora Maar au Chat" for $95.2 million. The company also instituted a dividend at $0.10 a share, its first such dividend in six years. Indeed, CEO Bill Ruprecht deservedly crowed in the press release that Sotheby's success validated its move away from lower-end, high cost auctions, usually where the value can be as little as $500. This strategy has caused Sotheby's lot volume to be cut in half over the last few years, and competitor Christie's has been happy to pick up the slack, as the company says the segment is their most profitable.
Still, this Fool thinks it was the right decision. Auctioneering is a business with very high fixed costs, with experts to be paid, art to be stored, and guarantees to be paid upfront to sellers, to obtain large consignments of art to sell. Focusing on the high-end market, though, makes sense, as this is where buyers perceive Sotheby's to add real value to the auction process as a trusted intermediary. This market is also safely insulated from online auction giant eBay
Still, there are some new risks to consider now that Sotheby's is back in the black. The global art market is notoriously cyclical, and some experts worry that the market's recent surge is unsustainable. Secondly, some of the largest holders of Sotheby's stock recently exited or substantially trimmed their positions; Ariel Capital dumped its 12.3% stake in the company that it bought in 2002 earlier this year, stating that Sotheby's was now richly priced. And the Taubman family, long one of the largest holders of Sotheby's stock, cut its position last year from 22% to 12% of the company. With the stock priced at a P/E of 26, it certainly looks like investors are paying a premium for a cheery consensus.
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