Sotheby's (BID)

Sotheby's is the oldest international auction house in the world and in fact the oldest company on the NYSE. It specializes in art auctions. It also owns an art dealer, and provides loans with art as collateral. Sotheby's licenses its name to Realogy as Sotheby's International Reality LLC.

Sotheby's has built a stellar worldwide reputation. It has the record for the two most expensive paintings, the two most expensive sculpture, and the most expensive piece of contemporary art. For seven consecutive years they have sold the top lot for the year and four of the top five in 2007. They have licensed their name in real estate and jewelry.

In early 200, Sotheby's management changed because of a price fixing scandal. Since 2003, their revenue has more than tripped while maintaining a net profit margin of about 30%. They are doing this by focusing on their biggest customers. This brings higher prices and less work. It also gives them a competitive advantage since they have the biggest buyers which sellers want.

Because Sotheby's caters to the super wealthy around the world, they are not effected very strongly by the sag in the US's economy. Most of the art goes on sale when someone dies. Until immortality is perfected, they will have a steady stream of sellers.

Their finance division has the potential to create huge profits and change the value of art. In 2007, their financial services only accounted for .3% of their revenue. Management plans to increase this. Not only does this increase their profits directly, but it can also change the market for fine art.

Banks are unwilling to use fine art as collateral for a loan because they have neither the ability to appraise the artwork or sell it. Fine art has a large opportunity cost associated with it because it cannot be used as collateral for other opportunities. However, Sotheby's is the world leader at appraising and selling fine art. If they are successful at making their financial services widespread, the value of art will increase.

Sotheby's will probably not be able to grow as much as it did from 2003-2007. If management continues to focus on growing the company and the brand, the P/E should be 20-25 for the next two years. Depending on its success with the financial services, the P/E beyond that should be 15-30 with an expected value of 20.