By Spencer Jakab
If Daniel Loeb had gotten his way early this year, the chief
executive of Sotheby's would have been going, going, gone by
now.
Since then, a rapprochement between the activist manager of
hedge fund Third Point and the auction house has made the owners
one big, happy family. They would be a lot happier, though, if
Sotheby's share price were higher; it has trailed the S&P 500
by 27 percentage points this year.
Unlike art, investment performance isn't in the eye of the
beholder. Sotheby's had vigorously denied some of Mr. Loeb's
charges, such as that it is spending too much money, and said it
already was taking steps he recommended on other fronts, such as
boosting online auctions.
Even supposing Mr. Loeb's campaign to shake up the company was
much ado about nothing, the resolution shouldn't have left the
stock worth less than when it was raging. But it is.
An obvious culprit for this would be near-term profit
expectations, but those look fine. Analysts expect Sotheby's on
Friday to report earnings per share of $1.40 for the second
quarter, up from $1.33 in the same period a year before. That is
about what was predicted last fall.
A more likely reason concerns long-term expectations. Despite
inking an agreement with eBay Inc. to sell Picassos alongside
Pikachus, the ebb and flow of the auction business is tied to the
fortunes of rich people. In booming 2007, for example, Sotheby's
and Christie's had a combined $11 billion in auction sales. Two
years later, these were less than half as much amid a global
recession.
The impact on a business with bills to pay rain or shine is
stark. Sotheby's fell to a per-share loss of 10 cents in 2009 from
a profit of $3.25 in 2007. Likewise, between frothy 1999 and rocky
2002, the bottom line fell from a profit of 56 cents a share to a
loss of 89 cents.
Even with 2014's estimated earnings down 27% from 2007's result,
the stock trades at what seems like a reasonable 17 times.
Considering the extreme cyclicality of the business, though, that
modest price tag is about right.
So Sotheby's stock isn't likely to catch many higher bids--and
Mr. Loeb may enter a blue period.
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