Sotheby's BID
February 26, 2009 - 10:37am EST by
fw51
2009 2010
Price: 7.12 EPS $0.65 $0.625
Shares Out. (in M): 67 P/E 11.0x 11.0x
Market Cap (in $M): 479 P/FCF na na
Net Debt (in $M): 278 EBIT 0 0
TEV ($): 757 TEV/EBIT na na

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Description

Sotheby's (BID) - LONG

# of shrs o/s: 67mm

Stock price:      $7.12

Market cap.: $479mm

Debt: $513

Cash: $235mm

Enterprise value: $757mm

 

7.75% senior notes due June 15, 2015 could be a better buy than the equity if an institution can manage to get any - last time I checked it was quoted at 61 (BID bought back $21.8mm recently at 56c on the dollar).

It's meant to be catalyst-driven trading call with a fundamental angle of undervalued physical property assets, the discussion of BID's core business is skipped here. You can pull out any sell-side initiating reports and/or google to learn more about the duopoly industry structure for the global uber high-end auction business. VIC member torico780 also had a nice writeup on the company back to August 1 2002.

Value

1) Real estate asset value. The value of the company's real estate is understated on its balance sheet. The company's real estate alone could be worth more than $1 billion, above the current estimated enterprise value of $757 million.

2) brand equity, which is "invaluable" given Sotheby's global identity and duopoly status.

3) Hidden assets - about $200mm fine art inventory on the book that could be worth more

4) FWIW, Sidoti had 75c/sr EPS estimate for 2009. So it's trading below 10x - typically it should be several-fold higher multiple on a trough earnings when it hit the bottom so in this case, either the number is wrong (i.e. could be a lot lower), or the market is mispricing.

Catalysts

1) Christie's is for now officially kicked out of China market (pretty sure HK will be included) - not just the Hong Kong auction venue, which is the third largest revenue source for Christie's, but also the future supply of China antiques. So in China market, which has become increasingly important given the recent years' rise in China-related auction value, BID is now left to be monopoly. There might be a concern that even Sotheby's activity will be under more scrutiny of Chinese government and Hong Kong auction business might be hurt for a period of time for everybody, but in this case, damage for Christie's will be much bigger and the penalty will remain longer, too. 

2) BID is to report some time today, probably after the close as its earnings call is scheduled at 4:45pm. It'd be a non-event if not for this Christie's news since it already disclosed $5.3bn '08 actual sales (down from $6.2bn in '07 on Feb 12. By the way, out of total 67mm shrs, 10mm shrs are being shorted, making it one of the heavily shorted stocks. As long as there is at least one sell-side analyst who would ask the question about Christie's during the call, you can rest assured that those shorts will be squeezed to the hell. (brokers cover the stock: JMP, Sidoti, JPMorgan - call them NOW before the close to see what they would say).

3) even when Christie's screwed up on China, its Paris sales itself was a success, suggesting the uber high-end is slowing, but probably not as much as people feared.

 Real Estate

 The company has premier real estate locations, its headquarters in New York (York Avenue and 72nd), and its London facility (New Bond Street).

 The company completed the acquisition of its New York headquarters on 2/10/09, which is a 2-3c/shr accretion to BID's earnings due to the elimination of 10.4% capital lease, replaced with a mortgage rate of 5.6%, hence interest expense saving. It paid $370mm for the building, down from previously expected $400mm.

BID owns about 72% of its London building, located at London's Bond Street/New Bond Street. This real estate is considered some of the best and most valuable real estate in the world. Sotheby's moved into the London location in 1917. The carrying value is clearly understated on the balance sheet as its fixed assets at the end of 2Q were only $224 million. While we do not know the exact square footage of the building management has not disclosed), JMP analyst did work and found historical records stating that the company had occupied 129,000 square feet at one point, and it has since acquired additional square footage. If we assume the company's London location is 150,000 square feet, which this analyst believes is very conservative, and the building could sell for an estimated $4,500 per square foot, the estimated value could be $675 million. Such assumptions are based on a greater than 25% discount to the sale of Tiffany's London flagship store on Bond Street, which sold for about $6,700 per square foot in October 2007.

 As a result, between the two buildings, it is easy to arrive at a total real estate value worth more than $1 billion.

 Major shareholders

 Value investor Ariel owns more than 10% of the company. It disclosed it just added nearly half a million shares at the end of January before its ownership exceeded 10%.

Catalyst

) Christie's is for now officially kicked out of China market (pretty sure HK will be included) - not just the Hong Kong auction venue, which is the third largest revenue source for Christie's, but also the future supply of China antiques. So in China market, which has become increasingly important given the recent years' rise in China-related auction value, BID is now left to be monopoly. There might be a concern that even Sotheby's activity will be under more scrutiny of Chinese government and Hong Kong auction business might be hurt for a period of time for everybody, but in this case, damage for Christie's will be much bigger and the penalty will remain longer, too. 

2) BID is to report some time today, probably after the close as its earnings call is scheduled at 4:45pm. It'd be a non-event if not for this Christie's news since it already disclosed $5.3bn '08 actual sales (down from $6.2bn in '07 on Feb 12. By the way, out of total 67mm shrs, 10mm shrs are being shorted, making it one of the heavily shorted stocks. Just make sure at least one sell-side analyst will ask the question about Christie's so you can squeeze those shorts to the hell. (brokers cover the stock: JMP, Sidoti, JPMorgan).

3) even when Christie's screwed up on China, its Paris sales event itself during the last few days was a success, suggesting the uber high-end is slowing, but probably not as much as people feared.

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