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Activist Billionaire Daniel Loeb in a Battle for Control of Sotheby’s

March 18, 2014 | About:

Daniel Seth Loeb is founder of Third Point LLC, a New York-based hedge fund. On Feb. 27, he added Sotheby's (BID) at an average price of $50.51 and on March 11, he added the stock again at an average price of $47.27. He currently holds 6.65 million shares of the stock with a current value of $293 million in his portfolio and his stake in Sotheby's is about 9.6%. So let's take a look at this company and try to explain to investors the reasons why he is betting on it.

Rejecting His Proposal

Sotheby’s is an auctioneer of authenticated fine and decorative art and jewelry (collectively, art or works of art or artwork or property). The company’s operations have three segments: Auction, Finance and Dealer.

A few days ago, the company rejected Loeb's proposal for new board members (including him) and selected two others. In a letter to shareholders, Sotheby’s explained that the nominees “add no relevant expertise not already represented on the board of directors.” Loeb criticized that the current board members own less than 1% Sotheby’s shares. “All shareholders will benefit from having an owner’s perspective in the boardroom,” he said. No matter what he said, Sotheby’s nominated two new directors, and 10 of its 12 board nominees would be independent directors.

Other Hedge Fund

Marcato Capital Management LLC, run by Mick McGuire, who owns 6.6% of the auction house’s shares, has said that there is more than $1 billion in excess capital on balance sheet that should be returned to shareholders. Sotheby's declared a special dividend of $4.34 per share. The dividend will be payable on March 17, 2014, to stockholders of record on Feb. 12, 2014. The annual yield on the dividend is about 9%. It also plans to buy back up to $150 million in stock.

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 24x, trading at a discount compared to an average of 14x for the industry. To use another metric, its price-to-book ratio of 2.71x indicates a premium versus the industry average of 1.8x and the price-to-sales ratio of 3.62x is below the industry average of 2.83x. Two metrics indicate that the stock is relatively undervalued relative to its peers.

Earnings per share (EPS) increased in the most recent quarter compared to the same quarter a year ago. It has demonstrated a positive trend over the past four years. In the next graph we include the stock price because EPS often lead the stock price movement.

1395100457818.png

Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has decreased when compared to its ROE from the same quarter one year prior. Let´s compare the current ratio with competitors in the next table:

Ticker

CompanyName

ROE (%)

LQDT

LIQUIDITY SVCS

13.05

CPRT

COPART INC

23.61

BID

Sotheby's

10.91

As we can see, the firm has a lower ROE than Liquidity Services Inc. (LQDT) and Copart Inc. (CPRT).

Final Comment

The firm´s revenues rose about60% from the same quarter one year prior. Net operating cash flow also increased, and the stock price is up more than 20% on the same time-frame. All these are demonstrating the company´s good performance.

I would recommend investors to consider adding the stock for their long-term portfolios. Hedge fund gurus have also been active in the company in quarter four 2013. Gurus like Jim Simons (Trades, Portfolio), Eric Mindich (Trades, Portfolio) and Daniel Loeb (Trades, Portfolio) have also invested in it.

Disclosure: Damian Illia holds no position in any stocks mentioned.

About the author:

Damian Illia
A fundamental analyst at Lonetreeanalytics.com constantly looking for value and income investments.

Visit Damian Illia's Website


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