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Sotheby's Prepares for a Quarterly Hit

By Dan Caplinger - May 6, 2016 at 7:58AM

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The auction house's first-quarter results could include a large loss and a pullback in revenue.

Image source: Sotheby's.

Auctioneer Sotheby's (BID) has a history that goes back for centuries, and it has historically been able to weather the ups and downs of the art and collectibles markets reasonably well. Yet when you look at results on a quarterly basis, there will inevitably be periods during which any company goes through tough times. That's the situation Sotheby's faces as investors prepare for Monday's first-quarter financial report, as a huge pullback in sales could send the company to a sizable loss for the quarter. With that in mind, let's take an early look at what Sotheby's is likely to tell us and whether it can find a way to post a near-term rebound in the months to come.

Stats on Sotheby's

Expected EPS

($0.23)

Year-Ago EPS

$0.11

Expected Revenue Growth

$331.14 million

Trailing Earnings Multiple

43

Expected 5-Year Growth Rate

20%

Data source: Yahoo! Finance.

What's ahead for Sotheby's earnings?
In recent months, analysts have gotten increasingly nervous in their views about Sotheby's earnings, expanding their expectations for a first-quarter loss by $0.20 per share and making reductions to their full-year 2016 and 2017 projections. The stock, however, has posted a solid rebound, picking up 18% since early February.

Sotheby's fourth-quarter report showed many of the challenges that the auction house has faced recently. Revenue was down 4%, and a sizable non-cash income-tax charge linked to repatriation of overseas assets caused the company to post a net loss for the quarter on a GAAP basis. More ominous were words from CEO Tad Smith, who said that "we will likely have one or more difficult quarters as we ride through the current cycle." That comment referred in part to deteriorating conditions in the luxury goods market, reflecting what investors in high-end retailers had also seen.

Since then, investors have had a chance to see signs of how the collectibles market is performing. In early April, Sotheby's released the results of its Hong Kong spring auctions, announcing sales of more than $405 million. That figure was higher than the high-end estimate of the $286 million to $386 million range that Sotheby's had established for the auction. In the words of Sotheby's Asia divisional CEO Kevin Ching, "Our salesrooms were full of Chinese buyers, paddles shot into the air, and records tumbled all week long. If this is what a correction feels like, then I sure hope we have one in the autumn, too, because our sales are up 17% over last spring."

Indeed, many of the items at the Hong Kong auctions set impressive records. The sale of Zhang Daqian's Peach Blossom Spring brought in $34.7 million, which was a new record result for sales by the artist. The auction also included a De Beers sale of jewel known as Millennium Jewel 4, which sold for $31.8 million. That was also a record for any jewel sold at auction in Asia. Sales of the Pilkington Collection of Chinese Art brought in a total of $64.5 million, which doubled the high-end estimate for auction proceeds from the collection.

Yet all eyes are on Sotheby's spring auctions, with a full week of events set to kick off next week. The company believes that its sales of art from the contemporary, modern, and impressionist periods will suffer a big decline from similar sales a year ago. Some dealers are arguing that financial uncertainty is still keeping some would-be bidders on the sidelines, and that explains why revenue projections for the second quarter are also below 2015 levels. Nevertheless, the low expectations create the potential for a big surprise to the upside if things go better than planned.

In the Sotheby's report, it will be critical to see how the company expects to keep moving forward and weathering the weakness in certain areas of the market. Hong Kong's results were strong, but Sotheby's will need more auctions like that to bounce back for the long haul.

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