Another positive is business momentum. Put simply, the market for fine art is red hot, especially from China. Sotheby's recent show in Hong Kong generated over $400 million in net sales, second only to its April auction there. Q2 (ended June) was the firm's best quarter ever - and this is a firm with nearly 270 years of history! Fine art has been and will be an up-and-down market, but it is often difficult to predict the length of cycles here. This hot market could last for some time, and Sotheby's will benefit substantially from it.
The other fundamentals are solid. Cash on the balance sheet, at $666 (!) million, eclipses a debt load of about $477 million. Free cash flow can be lumpy depending on how long the firm holds inventory, but current trends are around $300 million annually. Profits cover interest an acceptable 8 times over.
Valuation, too, looks fairly attractive at $32. Sotheby's will always be a firm that experiences wild revenue swings from year to year, but over the long term the company has proven able to generate operating margins around 30% while growing sales at 5-7% annually. I don't see why this can't continue, given the multitude of new millionaires in developing countries and Asia's taste for fine art. At the same time, current valuation of about 2.5 times sales is below the firm's long-term average of about 3 times.
Given this, Sotheby's long-term value looks to be around $43 per share, about 35% above current trading levels. MagicDiligence rates BID as a solid Magic Formula purchase at current.
Steve owns no position in any stocks discussed in this article.