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Author: AESpot One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 102  
Subject: BID: Sotheby an interesting rec, but . . . ? Date: 5/21/2008 12:59 PM
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This week’s Economist has published an article on the art market this past week (May 15th issue), titled “Signs of weakness” (in the business section. See if this link works:

http://www.economist.com/business/displaystory.cfm?story_id=...

A few points from this article are worth noting:

1) Even though the headline earnings of a couple of pieces have been impressive, the bidding has been spread thin. It would be interesting to see statistics on those who are doing the high-roller type of bidding, but I would suspect that, more likely than not, some of those high-rollers have oil and other natural resource wealth to help bolster their purchasing purse.

2) Approximately one third (1/3) of the pieces up for auction either met at or below their guaranteed price. Comparing this to previous years and the level of the sales’ performance has, at least temporarily, gone down. However, the article notes that they (both Sotheby’s and Christie’s) are being more reserved (no pun intended) in offering their guarantees. They are also noting with credit that it’s more difficult to have reinsurance or to spread risks properly to obtain higher margins.

3) They mention that first quarter results were somewhat flaccid due to “lower commission margins, higher expenses and fewer lucrative single-owner sales.” The single owner sales are somewhat interesting to me. One should factor in what those “single-owners” look like. Are they those on their deathbed and tend to be old? Do they tend to be individuals who are in the prime of their lives who have a strike of genius in wanting to auction off pieces to share with the open market? Are they individuals who tend to be cash strapped and need more funds and thus are raising money through auction? It would be interesting to know more demographic information on these single owners so we can further assess trends.

After reading the Fool’s review on Sotheby's, I think there are a couple of additional points to bring up that there simply isn’t enough room to address in the newsletter. (One should note that that I’m going to limit my discussion primarily to art work to mean paintings/pictures photographs, and not necessarily antiquities, jewelry, artifacts or the like.)

-Part of the reasons for such higher costs of selling such items would be authentication. With the advance of materials, technology and information, the forgery market is ever-present and is quite spectacular in reproducing faux copies of various artists. Also, with the discovery of new stashes of artwork produced by various artists, it’s no wonder that the expenses are higher in researching provenance and authenticating would increase. However, despite these increases, I think that the Fool gets it right in saying that people who tend to enter this market, would pay the premium to help ensure authenticity. As the problem of forgeries increase, the value of the brand will increase (presuming Sotheby's can continue to help ensure authenticity to the best of their ability).

--One risk that is somewhat addressed but may need more investigation is that of repatriation. Over the past several years, more museums, governments, and individuals have continued to become more legally savvy in attempting to repatriate art that was either stolen, expropriated (almost same thing, right?). There was an article recently regarding the Egyptian government is attempting to repatriate the Rosetta stone from the British museum. Although extensive provenance research should alert auctioneers of potential liabilities that may be involved with a given piece (or pieces), this is not full-proof. Another example is still that of the artwork expropriated during World War II (WWII). Examples that you will eventually see may be once the Cuban economy becomes more open for foreign investors and how artwork that was expropriated is found throughout the world (and/or attempting to get sold off immediately after the country reopens). This is merely a risk of derivative lawsuit liability; perhaps not a substantial risk, but one that should be factored into one’s analysis.

If I get around to reading the 10K, perhaps I’ll post more on this. There are some other points, but I think, for now, these are the top two that come to mind. Also, sorry for grammar and typography, but this was written somewhat "on the fly".

Cheers!

~AESpot
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Author: valu3buff One star, 50 posts CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 90 of 102
Subject: Re: BID: Sotheby an interesting rec, but . . . ? Date: 6/6/2008 12:27 AM
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Hi AESpot,

This is what I remember from the TMF recommendation, the Economist article and the balance sheet:

1) I'm not sure the article said who were the types doing bidding now, but like the recommendation, the Economist did attribute future optimism in the company to the emerging wealth from oil in Russia and the Middle East, as well as CHina for other reasons. Sotheby's is an attractive place for these people to put their new money because of its strong reputation as a market for Western goods.

2) Yes, while Sotheby's does face a risk from guarantees, the fact that they have had such a long history in this market means that it is more likely for Sotheby's to have an accurate value for a particular item while the potential buyers are incorrect than vice versa. Furthermore, since Sotheby's is able to mark down the value of a good that does not meet the guaranteed price to the highest bid, when the market corrects itself and Sotheby's is able to sell the good for its new price (which hopefully is higher and what it expected), it would improve its balance sheet. Which I believe is already very solid.

3) I believe they said in a conference call that Q1 is also the slowest quarter anyway. I don't know what "single-owner" sales have to do with anything, but your idea that it involves cash-strapped or otherwise disadvantaged parties sounds good to me.

Authentication: It sounds to me that you think the increasing difficulty in authenticated items is a disadvantage, while TMF (and I, fwiw) think it to Sotheby's great advantage. As one of the two most reputable brands in the world, isn't it easier for them to pass the costs along to their customers, i.e. "Sotheby's says so - it must be real", while at the same time making their services more valuable?

If I had cash set aside for opportunistic buys I would have jumped on this already (along with half a dozen others), not only for the reasons above but also because I like investing in American companies that are well poised to exploit overseas growth. Sotheby's sure seems to fit that definition - since when have rich folks not wanted to show off for each other?

valu3buff
hoping to be one of those rich folks, but on my sailboat in the South Pacific, not betting on vases.

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Author: AESpot One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 91 of 102
Subject: Re: BID: Sotheby an interesting rec, but . . . ? Date: 6/10/2008 8:57 PM
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Hey, just letting you know I read your reply (good reply), and I'm just waiting for the time to be able to respond. My apologies. Thanks!

Cheers,

AESpot

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Author: AESpot One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 92 of 102
Subject: Re: BID: Sotheby an interesting rec, but . . . ? Date: 6/17/2008 11:43 AM
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Update:

I am probably not going to respond only because the rest of my portfolio is calling, but I do generally agree with your thoughts. I think I should have posted this more as potential risks, but I think BID will actually be a good long term holder. I think there are better values out there, but right now, it seems to be a good buy.

I'm about to post an article on the softening Russian art market which may affect both Sotheby's and Christies. It'll be in a different post, but same company.

Thanks for the reply post!

Cheers,

AESpot

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Author: AESpot One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 97 of 102
Subject: Re: BID: Sotheby an interesting rec, but . . . ? Date: 6/23/2008 11:42 PM
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Hi Valu3buff,

Okay so I lied, I'm going to reply to it simply because if you put the time into your thoughts, I'm thankful people are willing to share them (and plus I have internet at home now, which helps immensely!) BTW, I pretty much agree with your thoughts and may have some random thoughts to add.

>> 1)...Sotheby's is an attractive place for these people to put their new money because of its strong reputation as a market for Western goods.

Resp:
It is. Subsequent articles (in other posts) have been indicating strong sales and records in new areas that are of interest to the Asian, Arab and Russian clientele. (For example, see the post re Diamond sales and how those demographics are broken out). I do think this will only continue as (1) people who have the money looks for items that retain a unique value, yet have the potential to be an investment, (2) offer an alternative investment to what's on the standard markets and (3) continues to provide enjoyment/value to people. People have been collectors of various things for centuries. I don't see this going away any time soon, especially with the strength of various sales that are occurring in this squirrely market.

>>2) Yes, while Sotheby's does face a risk from guarantees, the fact that they have had such a long history in this market means that it is more likely for Sotheby's to have an accurate value for a particular item while the potential buyers are incorrect than vice versa.

Resp:
I'd actually agree with this. I think Christie's gets a lot of press attention and is known amongst the American crowd, but Sotheby's is pretty well known internationally and also has the exposure and data/intelligence to know when a given product line (i.e. items from a particular artist) are being more sought after. I think it should then, however, be understood that this is the type of company that one should know will always have a relatively higher inventory than would be "desired", but that may very well get priced into the stock.

>>2)...since Sotheby's is able to mark down the value of a good that does not meet the guaranteed price to the highest bid, when the market corrects itself and Sotheby's is able to sell the good for its new price ... it would improve its balance sheet.

Resp:
I agree. There are costs associated with carrying this inventory, and certainly risks. However, I have noticed just from looking at their auctions and their results, their ranges tend to be a little more conservative, and that a lot of the results have been exceeding their ranges. I actually like this conservative expectation and beat demand, versus having high hopes and being disappointed. It's more realistic, especially given the uncertainty in the current markets (both stock/financial and art).

>>3 I believe they said in a conference call that Q1 is also the slowest quarter anyway. I don't know what "single-owner" sales have to do with anything, but your idea that it involves cash-strapped or otherwise disadvantaged parties sounds good to me.

Resp:
A couple of things here. Yes, BID is a very cyclical stock and I think that should get factored into when people are looking to find a position in this stock. I would personally take a look at the chart, see where the past trend is, research the news and the 10K and 10Q, and see where a good starting position would be (i.e. around current levels, or moderately lower).

Second, I think the single-owner sales helps Sotheby's to reduce costs. It allows them to consolidate the collection of art and host an auction (which costs money to organize, advertise, puts your PR people on the line, challenges in presenting a unifying theme etc). However, it also allows them to enter into negotiations with a single party, which would (in my mind at least) reduce costs. If you had to negotiate with 10 various parties or simply one, which would you prefer? I'd prefer the single terms of agreement from a costs perspective and from a management perspective (although, maybe not from a risk management perspective).


>>Authentication: It sounds to me that you think the increasing difficulty in authenticated items is a disadvantage, while TMF (and I, fwiw) think it to Sotheby's great advantage.

Resp:
I actually agree. I think authentication will continue to require more money, but I also think this can work to Sotheby's brand and bottom line. If I were dropping 80k on a pair or Egyptian earrings, I'm willing to pay a 10k premium on having a less likelihood that they are fake with the valid research involved, than taking a chance. Given that authenticity seems to be one of the dominant issues of this century, this can certainly work for Sotheby's; if you see this quality go down, I would seriously reconsider investing in the stock. Likewise, if you see them investing in methods of authentication or pairing up with someone like RSA or a security firm, I would consider that a plus. And, yes, I do think it's easier for them to pass along those costs to willing buyers.


>>Sotheby's sure seems to fit that definition - since when have rich folks not wanted to show off for each other?

Resp: Point WELL taken. Aside from those rare ones like Buffet, there is a sense of being able to get something unique. I'll admit, I actually looked at the site to see if I could get something "cheap" (ha, I know there's a gallery (no pun intended) full of people laughing) for my girlfriend (which, right now, there isn't), but I did want something unique that couldn't be bought at the mall or matched easily. Plus, I figured I'd be able to enjoy it too. Oh well, maybe if the market does incredibly well over the next several years.


>>hoping to be one of those rich folks, but on my sailboat in the South Pacific, not betting on vases.

Likewise, except I do like the Ming vases and with China's market being as bullish as it is, who knows, maybe it'd be another investment to consider ; )

Thanks for the response and sorry it took so long to respond back!

Cheers!

AESpot

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