The shares have fallen 26% this year on disappointing earnings and concerns about whether slowing global growth could hurt the art market. At 16.1 times forward earnings expectations, the stock trades at a discount to its 19.1 historical average and to stocks like Tiffany (TIF) also tied to the luxury trade, Barron's said in a feature article over the weekend.
Sotheby's is "like an Old Master painting in desperate need of restoration," activist investor Daniel Loeb wrote to the company last year. After a contentious few months, that restoration work seems to have begun, Barron's said.
Since Loeb's October 2013 letter, Sotheby's has grown more shareholder-friendly, releasing more information, starting a stock buyback program, paying out more of its earnings via a hefty special dividend, and generally becoming more assertive with its balance sheet. It was already considering plans to sell its valuable New York and London real estate, Barron's noted.
The company's core business and its duopoly with rival Christie's remain as formidable as ever. And Sotheby's has growth opportunities, including a new partnership with eBay (EBAY) to run online auctions, Barron's added. The stock closed at $39.66 on Friday.
The shares could rise more than 25% to $50, said analysts at Stifel Nicolaus and Barrington Research.
TheStreet Ratings team rates SOTHEBY'S as a Buy with a ratings score of B. TheStreet Ratings Team has this to say about their recommendation:
"We rate SOTHEBY'S (BID) a BUY. This is driven by a few notable strengths, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its revenue growth, notable return on equity, expanding profit margins and largely solid financial position with reasonable debt levels by most measures. We feel these strengths outweigh the fact that the company has had lackluster performance in the stock itself."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- BID's revenue growth has slightly outpaced the industry average of 6.2%. Since the same quarter one year prior, revenues rose by 10.2%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
- Current return on equity exceeded its ROE from the same quarter one year prior. This is a clear sign of strength within the company. Compared to other companies in the Diversified Consumer Services industry and the overall market on the basis of return on equity, SOTHEBY'S has underperformed in comparison with the industry average, but has exceeded that of the S&P 500.
- The gross profit margin for SOTHEBY'S is rather high; currently it is at 58.61%. Regardless of BID's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, BID's net profit margin of 23.11% is significantly lower than the industry average.
- BID's debt-to-equity ratio of 0.99 is somewhat low overall, but it is high when compared to the industry average, implying that the management of the debt levels should be evaluated further. Regardless of the somewhat mixed results with the debt-to-equity ratio, the company's quick ratio of 1.30 is sturdy.
- SOTHEBY'S's earnings per share declined by 16.5% in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. We feel it is likely to report a decline in earnings in the coming year. During the past fiscal year, SOTHEBY'S increased its bottom line by earning $1.86 versus $1.56 in the prior year. For the next year, the market is expecting a contraction of 1.1% in earnings ($1.84 versus $1.86).
- You can view the full analysis from the report here: BID Ratings Report