Friday, November 11, 2005

The $14.9 Million Small Pheasant Vase

I don’t know too much about Sotheby’s, the old-line auction house—save that its sales peaked during the 1999 bubble year and dropped four straight years; its CEO went to jail for conspiring with Christie’s to fix the market, and after a few years out of the headlines the company has rebounded along with the art market, which appears to be on fire.

So I found the recent earnings call interesting, both from a Sotheby’s-specific point of view, as well as the company's own world view from the vantage point of its auction business.

Most interesting was the company’s commentary on the exploding international art markets, particularly in Russia.

Now, I am not suggesting Sotheby’s is a good “Russia Play,” or “China Play,” or any other kind of play.

But I find it intriguing that Ariel Capital, a firm whose long-term point of view and concentrated investment style I admire, now owns 15% of Sotheby’s common. I find it intriguing that there were precisely four analysts on the recent earnings call—and none of them from large investment houses. And I find it intriguing that the company stands to benefit from the rise of China, the flow of oil money coming out of the ground in Russia, and emerging-market trends elsewhere around the globe.

And I thought management’s commentary regarding the state the business and its view of the world to be sound—and worth sharing.

Bill Ruprecht, Sotheby's - President, CEO

A couple of comments, just on the fourth quarter and the business -- we've had exceptional sales so far in the fourth quarter. As I already indicated, our Impressionist and Modern Art sale last week in New York achieved results above our expectations....

The evening sale topped its high estimate and that's the first time that's happened with us since 1990. The higher items of sale was a Pablo Picasso preliminary drawing for the Women of Avignon, which sold for $13.7 million, which was triple its presale estimate of 3 to $6 million.

We had Hong Kong sales last month which were really superb. Sales totaled almost $110 million, which was the highest total in our 31-year history in Hong Kong, demonstrating remarkable strength and depth of interest in that marketplace.

We achieved, in that period, the highest price ever paid at auction in Asia for a work of art; it was the sale of a small pheasant vase, which sold for $14.9 million.

A couple of unique single-owner sales which recently took place, one in Germany, where we sold works belonging to the Royal House of Hanover, took place over nine days at the Marienburg Castle in Germany. We sold over $50 million, more than triple its pre-sale estimate of $16 million. Last week at the same time as our Impressionist series, we had the sale of more than 600 items from the collection of Lily and Edmond J. Safra. That sale achieved $49 million, above its pre-sale estimate of $26 million, for really wonderful French/Continental/English furniture, clocks, porcelain paintings, carpets, Faberge, Russian works of art; it was a terrific sale.

George Sutton, Craig-Hallum Capital - Analyst

Okay, last question, more specific to the strong Chinese and Russian markets -- can you give us any sense of expansion plans you might have there, either geographically or just through additional people?

Bill Ruprecht, Sotheby's - President, CEO

I think that the two marketplaces, frankly, could not be more different. As you probably know, there's an extraordinary concentration of wealth in Russia among a relatively small group of people. We've got very effective representation in Russia as well as in London and in New York, working closely with a large group of clients in that marketplace.

I would say that it feels to us as if we are serving that market well, having sold somewhere in the neighborhood of $300 million worth of Russian works of art in the last several years versus our traditional competitors having sold less than 100. So, we've got a bead and an intimacy on that marketplace that we like without a lot of fixed localized costs in Moscow, which I do not believe is the best way to serve that market.

In China, it's a fascinating marketplace, of course. There's a domestic PRC marketplace and then there's a Hong Kong marketplace, both sort of pan-Asian sales. Our trading environment historically has of course been in Hong Kong, welcoming buyers both from the mainland China marketplace as well as from the rest of the world. I think it's fair to say that the ceramics marketplace out there, which is a significant portion of the marketplace, is a very international market with many collectors inside the PRC but many collectors outside, spread throughout the world, in the States as well as in Europe.

This is a long-winded answer to say that, on the other hand, there's a very, very robust market inside the PRC for paintings and in particular modern paintings....

I think we're looking at it very carefully. I think we believe there's a role for us in the PRC marketplace, but we don't have any appetite to lunge into anything and create a bunch of enemies in the process.

Informed opinions and observations are welcome.

Jeff Matthews
I Am Not Making This Up

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.


jucojames said...

The explosion in art prices is just another indication of the global monetary inflation that is taking place. Sotheby's will continue to benefit as long as the market continues to allow the printing presses to work full time. However, at some point the market will choke on the liquidity and begin to destroy it.

When will this happen? I have no idea, but I would think that Sotheby's is a direct play on this macro variable. I tend not to like speculating in macro variables that I can't get my arms around.

henrymurfey said...

Lesson #1: Parents: spend time, effort, and money optimizing the right brain function of your children.

Lesson #2: Entrepreneurs: establish a structure in which children optimize their right brain function for a fee, of course.

Inquiring mind question: Are the items being bought with profits from sale of other assets? with money from a continuing flow of funds? or is it impossible to know?

credibility said...

Henry Blodget blogged Overstock today.

Anecdotal Evidence In: Overstock Sucks
Three readers share Overstock customer-service horror stories (please see comments at end of post). Overstock web traffic continues to grow--up 40%-plus year-over-year per Comscore--and CEO Patrick Byrne has been mercifully silent on the subject of dastardly short-sellers of late. Judging from these three anecdotes, however, the company has serious work to do.

Posted by Henry Blodget on November 11, 2005 at 12:19 PM |

stealthelephant said...

On the macro point: it is tempting to speculate that Sotheby's recent resurgence will go away now that the easy money environment is going away too. That presupposes wealth generated from these last 5 years also withers and spending on such luxury clamps down with the overlay of higher interest rates. I would argue the macro environment is quite favorable to Sotheby's for two reasons: 1) Art as an asset class has respectability. Money moving away from stock markets and real estate (inflation, interest rates) will find a comfortable home in high-end art engendering stable if not growing demand. 2) The emerging wealth of Russia and all of Asia (not just China) will increase core revenues. These are lucrative markets for Sotheby's that didn't exist 10 years ago. Both of these developments add a badly needed piece of growth to the auction market. This isn't the kind of market that will be supplanted by the Internet. Ever. That's pretty exciting.

AllenCap said...

I agree with Jucojames. I think that the increase in sotherby's auctions worldwide is another arena where the global pool of cash is sloshing around. From real estate, to raw materials and metals, to private equity, to the 10 year, and the world wide capital markets.

There is a lot of liquidity moving around, and it's worldwide. After seeing the level of non-competitive participation (much of which was foreign i presume) in the 10 year treasury auction i can't help but wonder if the yield curve inverts.

Another thought that occured to me was that both russia and china are societies that are coming out from under totalitarian state rule. That a statement made in 'relatives.' I wouldn't call russia or the PRC free countries, but they are different than they were.

Art no doubt was suppressed for a very long time. Much like all self-expression in communist societies. I wonder if this is the newly established commecial/elite class flexing a little muscle and showing off some. Maybe it's a statement that they have arrived. Possibly immitating the west's affinity for culture.

-just some thoughts

Sam S. Park said...

I can't believe what some people pay for art. Some dude bought a steel sculpture by David Smith for $23.8 MILLION. This was a record price which was auctioned at Sotheby's. Is art going to be the next bubble?

Jeff Matthews said...

An observation: what is "different this time" versus the dot-com bubble days when the art business was last on fire, is the presence of huge oil money in the Middle East and Russia, plus the US real estate markets and the hedge fund buyers.

Could the cycle have further to go?

Aaron Koral said...

Hi Jeff - Happy Friday! After reading your post, my only comment (question) is this - could those buyers in Russia and China see art collectibles as "undervalued" as opposed to hard assets such as real estate, and "soft" assets such as stocks and bonds, which may suffer from a perception of "over-valuation"? Again, just a thought...keep up the great work, and here's hoping your next trade is a profitable one!

Its_strange said...

You telling me Sotheby doesn't have to worry about OSTK's plans to offer auctions worldwide ?

I gotta figure there are some lawyers read this . Now speak up !

When Patrick identified the caller Bob O'Brien on the OSTK conference call did he know his real name was Phil Saunders ? We know the call was a set up . We know they had talked before the call but what point EXACTLY did Patrick know Bob's real name was Phil Saunders ? Think a jury would find the answer interesting ?

Any word on the Gradient / Rocker reply to the suit ?

Its_strange said...

I thought Jeff was going to look at a company who's free cash flow was missed by the analysts by 100% ? That still planned , Jeff ?

My realestate pal in northern NJ is telling ALL her sellers to drop the asking price or just plain forget it.. Just plain forget it and stop calling asking the same damn questions.

Jeff Matthews said...

Aaron: I'm not sure what the Asian art buyers are thinking...but if you look at how lousy the Chinese stock mark has been during this whole boom it would appear capital is going into businesses and hard assets like real estate.

As for Russia, I think much of the wealth that's changing hands in art is your basic money-laundering by ex-Communists who "acquired" state assets at below-market prices and are now raking it in thanks to the spike in commodities.

After all, have you ever bought anything that was "Made In Russia?"