Going Once… Going Twice…
by Jeff Clark
November 7, 2006
Sixty million dollars doesn’t buy what it used to…
My wife and I are looking for a few paintings to hang on the walls of our home. Actually, my wife is looking. I’m just tagging along, lugging the checkbook, and hoping whatever she finds to replace the “Dogs Playing Poker” motif that currently adorns our humble abode costs less than the abode itself.
One of our friends, either in an attempt to appear helpful or as part of some sick joke, gave my wife a catalog of the “Impressionist & Modern Art” items to be auctioned off tonight at Sotheby’s.
For a mere $60 million, I can buy Claude Monet’s “La Plage A Trouville” to cover up the crayon-stained wall in my son’s bedroom, use Paul Cezanne’s “Nature Morte Aux Fruits et Pot De Gingembre” to fill in the gap between the big-screen TV and the DVD cabinet, and still have enough left over to buy a book that explains exactly what I just bought.
One thing that doesn’t need explaining, however, is the enormous profit generated by Sotheby’s (BID).
Sotheby’s earns a commission of between 5% and 10% on every item the company auctions. With demand for fine art on the rise, and prices as high as they’ve ever been, Sotheby’s is raking in a fortune.
That good fortune is more than evident in the price of Sotheby’s stock, which has doubled in the past year. In fact, BID’s chart is a work of art in itself…
But like a Donatello sculpture, it looks like an unfinished work of art…
Sotheby’s is scheduled to announce earnings after the market closes on Wednesday. Clearly, expectations are high… as many investors familiar with the art community believe business can’t possibly get better.
Of course, once business can’t possibly get any better, it can only get worse. And, that’s the potential fear with BID.
Big profits create big competition. Sotheby’s and privately held Christie’s are fighting it out with a number of new start-up auction companies for new business. In order to secure the business, auction houses are promising sellers larger and larger guarantees – undisclosed sums that are paid regardless of a sale’s outcome.
Guarantees protect the sellers, but the auction houses could be out hundreds of millions of dollars and stuck with warehouses full of art that goes unsold.
So while BID shareholders are currently grinning wider than the Mona Lisa, a little bit of caution is in order. There’s no doubt Sotheby’s is going to announce terrific results for the most recent quarter. The real question is – what sort of guidance will they give for the future?
Cautious investors might want to put a few of their shares on the auction block.
Best regards and good trading,
Jeff Clark
