Looking at a chart of BID its share price has picked the top of many bubbles. Ranging from the Japanese boom in 1989, the tech boom in 1999, housing/oil boom in 2007. While it has threatened to make new highs in 2011 and 2014 it hasn't made a substantially new high since 2007. This suggests that talk of a equity bubble might be premature and we should stay long the market.
Source: Bloomberg
As an investment itself Sotheby's (BID) is starting to look interesting. For such a cyclical company BID has stood the test of time. It was founded in 1744 in London to auction a couple of hundred valuable books. BID is the oldest company listed on the New York Stock Exchange. It has the characteristics of a great business as there are only two auction houses of substance BID and Christie's. Christie's is privately owned by French billionaire Francois Pinault who purchased the company for $1.2 billion in 1998. It is a great long term duopoly market with no other comparable listed peer. While it might seem like a simple matching making business they add value through performing due diligence to authenticate and determine ownership of the property being sold.
Source: Sotheby's investor day
Some change will do you good
This past week BID announced the appointment of Tad Smith ex Madison Square Garden and Starwood as CEO. Tad replaces the old CEO who has served in his role since 2000. He held very little shares in the company while receiving country club perks and a driver. Though Tad has little art experience he has experience in growing brands.
This change should be welcomed by investors as previous management have not fully taken advantage of the buoyant art market. As seen above sales have rebounded to peak levels but EBIT is nowhere near peak.
Help from activists
Shareholder activists are here to help. Third point and Marcato two well regarded activist funds own 19% of BID. They are pushing management to make better use of their capital. They are arguing for share buybacks and release of capital by selling and leasing back their London and New York headquarters. BID has shown great timing by purchasing their New York headquarters on February the 6th 2009 for $370 million subject to a $235 million mortgage. They are currently reviewing options on whether or not to sell. BID has a board to match its illustrious history including such names as the Duke of Devonshire. Thankfully Dan Loeb has appointed himself and two other members to the board. Interestingly Danny Meyer the Shake shack co-founder is also a board member.
No dummy bids here
During the financial crisis in 2008 BID guaranteed minimum prices for nearly half of their artwork. Obviously this didn't do to well as markets for everything around the world crashed. BID has hedged this risk by entering into contracts with dealers and other third parties to pass on this risk. They are entitled to receive a share of the commission if the property sells. One problem for BID is that the art market just like the equity market is cyclical and we are in the sixth year of what is normally a five to seven year cycle.
Bid on a 271 year old company
You can't marry someone hoping that they will change. Company management and performance is similar, underperformers will continue to under deliver and outperformers will continue to surprise on the upside. The change of CEO should bode well for the future of what is essentially a duopoly business and a scarce asset.
Jason
Disclosure: Decisive does not have a long position in Sotheby's (BID) stock.
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