I am always looking for a bargain, whether that be trawling through supermarket aisles for “buy one, get one free” deals or pouncing on cheap cinema tickets. The same applies to stock-picking.
One stock that surely fits the bill is Sotheby’s, the famed art auction house with a 48% share of the global market, just behind Christie’s with 52%.
Sotheby’s (NYSE:BID)
Sotheby’s approach is simple. If you have an expensive painting and want to sell it, then it will arrange an auction of wealthy buyers. When the piece is sold, both the buyer and the vendor pay an agent’s commission. Multiply this many times over and you have the makings of a very lucrative business – in fact generating EBITDA margins of more than 30%.
Additionally, at the second quarter results in August, the company reported that the fine art market remained resilient despite the present economic woes. CEO Bill Ruprecht added that “the wealthy were still buying expensive works of art” and he expected a strong third quarter in 2008 due to the recent Damien Hirst auction, which raised more than $125m from shifting Hirst’s pickled sharks and butterfly paintings.
And that’s not all. In light of the credit-quake, many bankers who own expensive collections are now being forced to get rid of them. For example, Richard Fuld, ex-CEO of Lehman Brothers, has just put 16 of his paintings under the hammer – worth some $15-$20m in total. Logically this should impact prices, but there’s no sign of it yet, with well-heeled buyers (such as Russian oligarchs) still flocking to auctions in their droves.
On the financials, Wall Street is forecasting 2008 revenues and underlying earnings per share of $923m and $2.34 respectively, rising to $960m and $2.54 in 2009 – putting the shares on lowly p/e ratios of 8.6 and 8.0. I think this looks good value for such a top-notch brand operating in a duopoly with high barriers to entry. Net debts of $225m are comfortably covered, with the group enjoying an investment grade rating from Standard & Poor’s.
So what’s spooked Wall Street, with the shares tumbling more than 60% from their 52-week high of $57? Well, investors fear that as the recession bites, even the super-rich will stop buying art, hitting commissions and squeezing its profit margins. Inevitably this will happen to an extent, yet – while the rest of the MoneyWeek team might not agree with me – I still can’t see demand dropping off a cliff anytime soon.
Recommendation: speculative BUY at $19.49 (market cap $1.3bn)
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments.