| Daniel Loeb (Bloomberg) |
The activist hedge fund firms that have been pushing for change at Sotheby’s may have won their big boardroom battle. But they may be losing the war. Shares of the famed auctioneer stood at close to $45 on May 5, when the company agreed to appoint Third Point founder Daniel Loeb and two other Loeb-selected people to its board of directors as part of a compromise agreement to avert a proxy fight with the New York-based activist firm.
“This is good for shareholders and we are supportive of the settlement,” wrote Stifel, Nicolaus & Co. analyst David Schick at the time.
However, four and a half months later, the story is a lot different. The stock is down to about $36 — off 20 percent from that euphoric day in May — and Schick has reassessed his view of the stock. On Tuesday the analyst cut his price target from $65 to $50, citing “the lower probability of a catalyst” in the second half of this year, in a note to clients. In other words, with a standstill agreement in place between the company and the largest shareholder, there are seemingly few outside forces that could send the stock higher.
Schick maintained his Buy recommendation for the stock — though he did not say why — and he also raised his third-quarter earnings estimate from $0.28 per share to $0.31. But this remains below the Street consensus of $0.41 per share, Schick noted. At the same time, Schick lowered his fourth-quarter and 2015 earnings estimates.
In the note, the Stifel, Nicolaus analyst also pointed to what he called a “weakening of the improvement” in the art market and “substantial weakening” of the stock market, noting that the beta — or volatility of a security in comparison to the market — of Sotheby’s is twice that of the overall market.
Part of Schick’s concern stems from China. He noted that other luxury brands are also signaling “some incremental deceleration” in China. “Art supply can be quite volatile and it’s difficult to procure consignment when the luxury consumer is delaying new purchases,” the Stifel analyst explained.
The stock decline and downgrade could hurt more hedge fund firms than Third Point, the largest shareholder at the end of the second quarter with 9.64 percent of the shares. Remember, Richard (Mick) McGuire III, of San Francisco-based Marcato Capital Management, was the first activist in the stock and owned 6.72 percent of the shares at the end of the second quarter.
On August 20, Marcato boosted its stake by nearly 50 percent, to 9.53 percent, and it now owns slightly less than Third Point. Sotheby’s now also represents about 15 percent of Marcato’s total U.S. stock portfolio. In the filing, McGuire did not comment on any possible plans or intentions, although last year he called on Sotheby’s to sell its New York and London properties, among other proposals.
Maybe the next catalyst will come from Marcato.
