The red-hot art market takes its seasonal temperature this November during a series of marquee auctions at stalwarts Christie’s and Sotheby’s.
As collectors swarm the global marketplace looking for today’s bargain and tomorrow’s bonanza, Sotheby’s wants to fortify its stock and standing as an auction house with 270 years of playing matchmaker with masterworks.
Shares of the New York-based auction house that specializes in selling art, jewelry and other collectibles closed Monday at $37.81. The stock is down 28.7 percent from this time last year.
Craig-Hallum Capital Group upgraded the stock to a buy rating with a price target of $45 on Oct. 7 from a hold initiated in June 2013. The Minneapolis-based investment firm pointed to Christie’s establishment of a 2 percent commission fee for art works that sell in excess of the high-end estimate, calling it “a smart move and one likely to be matched by Sotheby’s.”
“It looks like they found what could be a solution to alleviate the downward pressure that’s been the case over the last two years,” said Jason Kreyer, research analyst at Craig-Hallum Capital Group.
The company reported disappointing second-quarter results on Aug. 8, including a 10.2 percent increase in sales and a 15.4 percent decrease in net income. Its diluted earnings per share of $1.11 were 20 cents short of the consensus estimate. Sotheby’s was unavailable to comment.
Activist investor Daniel Loeb gained three board seats this May following a lengthy proxy battle. In an Oct. 2013 open letter, Loeb called for CEO Bill Ruprecht’s resignation.
“Unfortunately, you have not led the business forward in today’s art market,” Loeb wrote. “It is apparent to us from our meeting that you do not fully grasp the central importance of contemporary and modern art to the company’s growth strategy, which is highly problematic since these are the categories expanding most rapidly among new collectors.”
Sotheby’s second quarter financials included special charge expenses of $24.3 million spent on litigation with Loeb, whose New York-based hedge fund Third Point LLC is the company’s leading institutional investor with 9.6 percent ownership, according to Sotheby’s ownership profile.
“He’s really focused on getting costs out of the model,” said Kreyer, who thinks Loeb has taken a disciplined approach now that he’s on the board of directors. The Craig-Hallum Capital Group report forecasts “significant market expansion in 2015” in response to a board that will lower costs and reinvest.
Sotheby’s is hoping to transform its business through a rebooted partnership with eBay. They tried it once before in 2002, but it ended after one year.
“They don’t sell Van Goghs and Picassos every day,” said James Yood, arts journalist and adjunct professor at the School of the Art Institute of Chicago. “A lot of what they do is perhaps small, but very important, there’s a collector base and you can make money selling silverware.”
One of Sotheby’s areas that leaves analysts most encouraged is the Nov. 4 Impressionist and Modern Art Evening Sale in New York City, which features two sculptures by Giacometti and Modigliani that could earn upwards of $140 million, combined.
Goldman Sachs issued an Oct. 20 report that said, “We expect Sotheby’s to be the share winner this fall, driven in by part a robust Impressionist slate.” The report estimates that Sotheby’s will generate $407 million in sales, a 40 percent increase from last year’s total.
At a Nov. 11 Contemporary Auction Evening, Sotheby’s is banking on such brand names as Johns, Rauschenberg, Rothko and Warhol to paint over its poor May showing. Christies, however, maintains the dominant market share in contemporary art. Goldman Sachs estimates that Christie’s will outsell Sotheby’s, when it holds its major November auction one day later, by $450 million with sales forecasted at $855 million.
Sotheby’s is scheduled to release its third-quarter earnings on Nov. 10, but Kreyer called them immaterial because the majority of the auction house’s sales are conducted at marquee auctions in the second and fourth quarters. “Don’t expect a significant move in the stock, it just doesn’t really move the needle here,” he said.
Sotheby’s is publicly traded while Christie’s is a privately owned company. This critical difference creates a situation that is more complex than who sells more paintings.
“What’s often missed in this whole story is that it isn’t about Sotheby’s against Christie’s,” said Marion Maneker of Art Market Monitor. “It’s whether Sotheby’s on its own can fulfill the expectations of the buyers from the proxy fight and whether there is something transformative to be done with the business.”