Bullish on Sotheby's

Barron's published a report from investment research group Cowen and Company which is bullish on future performance of Sotheby's stock. Several factors come into play, including an improving art market, new management and a strong brand.

Barron's reports
We upgrade Sotheby’s to Outperform from Market Perform with a new $45 price target, up from $38.

We like Sotheby’s (ticker: BID) ongoing modern transformation underway, capital light agency business model, stabilizing margin profile, and favorable risk/reward given prospects of an improving art market. The catalyst is new management execution combined with a strong brand equity and global platform.

Specifically, we like demonstrated auction commission margin improvement in addition to improving sell-through statistics. Better sell-through rates indicate that current demand healthy and prospects of acquiring superior inventory may follow. Sotheby’s stabilizing auction commission margin profile indicates that the pricing environment and discipline appear under control.

We view Sotheby’s as a long-term global luxury idea given sustainable barriers to entry in a duopolistic art market--this is underscored by top-notch brand equity and selling specialist capabilities.

We believe Sotheby’s transformation is in the early innings and likely to gain momentum in 2017. Chief Executive Tad Smith joined in March 2015 followed by Chief Financial Officer Mike Goss in March 2016. Under their leadership, we have been encouraged by the significant strides the company has made across it key priorities.

Strategically, we like: 1) Sotheby’s addressing talent gaps and strengthening the fine art with the acquisition of Art Agency Partners as well as the arrival of key new staff, including Marc Porter and Saara Pritchard in the New Year; 2) efforts focused on growth with middle-market investments in digital and online development; and 3) improving private sales (up 98% in the third quarter versus down 33% in the first half and down 45% in third-quarter 2015).

Financially, we’re positive on: 1) focus on profitable deal-making/managing use of guarantees wisely (as of Nov. 4, Sotheby’s reported $258.8 million of auction guarantees partly offset by $144.2 million in irrevocable bids; we view this as an improvement from $171.2 million of auction guarantees reduced by risk and reward sharing arrangements totaling $90.4 million as of Nov. 6, 2015, and $219.2 million of auction guarantees reduced by risk and reward sharing arrangements totaling $48.8 million as of Nov. 5, 2014); and 2) auction commission margin stabilizing (i.e., improved 150 basis points to 16.9% for six months ending Sept. 30, 2016, versus 15.4% a year ago).

Fundamentally, we like: 1) solid free-cash-flow management with estimated $125 million-$150 million free cash flow annually (6%-8% yield); and 2) share buybacks (purchased 11.1 million shares for about $286 million or about 17% of float during the nine months ending Sept. 30, 2016).
Source: Barron's 

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