Stanley Gibbons: Swimming Confidently Against the Tide

September 24, 2009

Skate’s Target Price Increased from GBX 160 to GBX 180

On Monday, September 28, Stanley Gibbons, a UK-based philatelic trading and collectibles company, will pay an interim dividend of GBX 2 per share (the current share price is approximately GBX 140), which is unchanged with respect to the dividend for the same period last year and equivalent to about 40% of the dividend payout ratio. Stanley Gibbons thus maintains its position as one of the few dividend payers among the twelve international art industry companies included in Skate’s Art Stocks Index.

When Stanley Gibbons recently announced its half-year results, the company completely met our expectations by achieving 18% top line growth over the same period of 2008 and a 13% increase in profit before tax. Following a share price appreciation of 45% over the last six months, Stanley Gibbons shares traded at more than GBX 140 on September 23, 2009, edging very close to the GBX 160 share price target set by Skate’s at the beginning of the year.

The company’s strong push in online trading capabilities is based on extensive development of stamps and other collectibles databases and is supported by growing international sales efforts. In our view, this provides a sustainable growth opportunity in a space where Stanley Gibbons is the only sizeable corporate player. Skate’s also notes the stellar shareholder base and free float nature of Stanley Gibbons. With a current market capitalization of GBP 35.12 million, the firm remains attractively valued at less than 2 of projected 2009 sales and less than 10 of projected 2009 net income. Skate’s hereby raises the target price for Stanley Gibbons shares from GBX 160 to GBX 180 per share.

In the long run, we believe that a major concern associated with Stanley Gibbons’ business model is the overall limited potential for the philatelic market segment, which remains a less fashionable collectibles category and receives very little following from younger people. To date, Stanley Gibbons has had little success in diversifying into other categories – the autographs, records and memorabilia segment (the only non-stamps business unit) currently contributes to just over 10% of the top line. Furthermore, it experienced a 5% revenue decline in the first six months of 2009 (against robust growth in core philatelic segment). In our view, Stanley Gibbons is becoming more focused and more dependent on the economics of its philatelic trade and publishing, which could result in limited growth in the future.

Click here for the original story on Skate’s website

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Monday Sale of Ferdinand Hodler to Test Strength of Skate’s Top 1000

September 19, 2009

Skate’s Top 1000, our ranking of the world’s most valuable art, consists of works by 183 artists. About a dozen of these artists are represented by just a single work priced above the threshold price of Skate’s Top 1000, which currently stands at USD 5,730,951. Given that these artists periodically enter and drop out of the ranking as a result of changing market dynamics, we refer to them as “Littoral Artists.” Generally speaking, only one additional price record is enough to more firmly plant an artist in Skate’s Top 1000 and thus avoid the designation of “Littoral Artist.”

Ferdinand Hodler – Littoral Artist (Swiss) – was in Skate’s Top 1000 as late as April 30, 2008, with Eiger, Monch und Jungfrau uber dem Nebelmeer (1908) occupying the 996th position in the ranking. As is often the case with the Littoral Artists, Hodler was washed away by the Q2 2009 auctions that brought the threshold price for Skate’s Top 1000 to USD 5,730,951, which is where it remains to this date. Eiger, Monch und Jungfrau uber dem Nebelmeer sold for USD 5,702,830 in November 2005, including buyer’s premium.

Next week, almost four years after the sale of Eiger, Monch und Jungfrau uber dem Nebelmeer, which remains Hodler’s price record to date, Christie’s will bring a highly comparable painting to the market – Eiger, Monch und Jungfrau von Beatenberg – when it holds its auction in Zurich on September 21, 2009. This work has been assigned a range of USD 3,855,730 – 5,783,595. If the work sells at the higher end of this range, it could potentially enter Skate’s Top 1000 and bring Hodler back into the ranking of the world’s most valuable artists and give the artist a new price record.

At Skate’s we believe that Christie’s setting the price range with a width equal to exactly 50% of the end range of the estimate is very indicative of the auction house’s expectations: (i) Christie’s has little confidence as to where the market will price the work (if it indeed selss); (ii) the high estimate is very close to the benchmark of Hodler’s 2005 price record and appears to be a nostalgic look back to the times of old, which Christie’s hopes to build upon (although more realistically down from). We believe Christie’s will feel a great sense of victory if the sale clears the assigned range. If Eiger, Monch und Jungfrau von Beatenberg does sell, which is by no means certain, our bet is that the work will fetch no more than USD 4 million.

In the October issue of Skate’s Art Industry Investment Report, we will discuss in detail the results of this auction, as well as preview the coming fall auction season.

Click here for the original story on Skate’s website

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Phillips’ Aggressive Auctions – Risky or Sound in a Down Market?

September 14, 2009

On Friday, September 11, 2009, The Wall Street Journal ran a story on Phillips de Pury & Co.’s plans for an aggressive round of contemporary art auctions over the next year and a half (see Kelly Crow’s “Doubling Down on the Art Market”). Although the art market has largely stabilized in the wake of its significant decline amidst the global financial crisis, one might naturally question whether Phillips’ decision to step up sales of notoriously volatile contemporary art represents too much risk in what is still very much a down market.

At Skate’s, we believe that Phillips’ move is generally very sound, as it is based on a number of solid and pragmatic business premises:

  1. It attempts to smoothen what is otherwise a highly seasonal cash flow. In the traditional auction house business model, the high seasons occur in the spring and fall, which are interrupted by the winter and summer months that generally see negative cash flow. Difficulties in predicting the success of the high auction seasons can lead to significant losses for the entire year. Having many smaller auctions spread more evenly throughout the year could work well toward creating a more stable cash flow for the firm.
  2. Dealing with contemporary art carries less overall risk, as vetting for authenticity and trade restriction is easier and requires less cost-intensive expert research. Furthermore, securing concessions is easier thanks to a broader supply of artworks, which means that there are no pitfalls of guarantees and advances. Finally, the role of marketing is stronger when it comes to influencing price ranges, as less well-known art is marketed to a less opinionated or knowledgeable public that is more susceptible to the influence of auctioneers. This segment of the art market is growing, largely thanks to a broader universe of art lovers — just look at the attendance numbers at art fairs! Furthermore, this segment is not sufficiently served by the large, established auction houses, which means that this is a very good opportunity for Phillips.
  3. The strategy of finding the right market segment and focusing on it has worked very well in recent years for a number of firms. Significant volume has been built through focus on high growth fields, some examples of which include Bloomsbury for rare books; Heritage Auction Galleries for coins, sports memorabilia and American art; MacDougall’s for Russian art, and so forth. Contemporary art offers a rewarding new segment, and Phillips’ way of approaching it as a “portfolio of themes” provides a solid opportunity to groom the best sub-segments and develop them into profitable business units going forward.

We believe there are two key marketing aspects to watch for with Phillip’s new auction strategy:

  1. Phillips must commit a significant marketing budget to support its strategy and generate considerable interest in each of its auctions in order to avoid disappointing sellers. Disappointment would result through a failure to see improvements in price discovery at auctions (in comparison to what private sales offer) or, even worse, seeing artworks go unsold, thus further tarnishing their marketability. A powerful marketing strategy is also necessary from the point of view of supporting prices for contemporary art.
  2. Coordinating its market strategy with influential contemporary art dealers is crucial for Phillips. A broad supply is a big risk factor, and by drumming up the names of contemporary artists that have a significant free float (i.e., a large number of artworks in private hands) Phillips could very well provoke a supply spike in the run-up to its auctions. The resulting increase in private or non-auction sales could result in under-pricing artworks by the same artist once an actual auction takes place.

Should Phillips overdo it on this new strategy, the art market could notice very quickly that the auction house’s brand name is being used as a vehicle to push artists with little name recognition – artists who would otherwise be unlikely to make it into a major auction house catalogue. This would in turn raise the issue of resale value for items purchased at Phillips. One upcoming example to watch is an auction on September 26, which will feature five Ukrainian artists, two of whom have no auction price records to speak of.

Click here for the original story on Skate’s website

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Sotheby’s Finance Segment Emerges as Group’s Most Profitable

September 12, 2009

When Sotheby’s recently published its six-month financial statements, one fact generally went unnoticed – the firm’s only profitable segment in the first half of 2009 turned out to be Finance.

Sotheby’s Finance segment provides certain collectors and art dealers with financing, which is generally secured by works of art that the company either has in its possession or permits borrowers to possess. According to Sotheby’s financial statement, “the Finance segment generally makes two types of secured loans: (1) advances secured by consigned property to borrowers who are contractually committed, in the near term, to sell the property at auction (a “consignor advance”); and (2) general purpose term loans to collectors or art dealers secured by property not presently intended for sale (a “term loan”). A consignor advance allows a consignor to receive funds shortly after consignment for an auction that will occur several weeks or months in the future, while preserving for the benefit of the consignor the potential of the auction process.”

In the first half of 2009, Sotheby’s realized a profit of USD 3.8 million from this activity (a margin of over 63%!) while its auction and dealer segments reported net losses.

Like any other high return activity, Sotheby’s Finance segment operates with significant risk. To lure borrowers, the company targets a 50% loan-to-value (LTV) ratio for the loans. This figure is significantly higher than market rates, as there are so few capital providers who are willing to lend against art, which is generally viewed as a relatively illiquid asset class that carries significant ownership costs and unique risks, such as authenticity, which do not exist with other types of collateral.

And even this is not enough – according to Sotheby’s Form 10Q disclosure, “certain Finance segment loans are made at initial loan-to-value ratios higher than 50%. In addition, as a result of the Company’s normal periodic revaluation of loan collateral, the loan-to-value ratio of certain loans may increase above the 50% target loan-to-value ratio due to decreases in the low auction estimates of the collateral. As of June 30, 2009, Finance segment loans with loan-to-value ratios above 50% totaled $64.7 million and represented 42% of net Notes Receivable and Consignor Advances. The collateral related to such loans has a low auction estimate of approximately $99.8 million…As of June 30, 2009, one term loan of $20.7 million (collateralized by works of art with a low auction estimate of approximately $55.2 million) and one consignor advance of $18.5 million (collateralized by works of art with a low auction estimate of approximately $56.5 million) comprised approximately 13.4% and 11.9%, respectively, of the net Notes Receivable and Consignor Advances balance.”

So the stakes are high again for the upcoming auction season with over USD 65 million in loans issued by Sotheby’s to clients who risk default in the event their artworks fail to sell. Generously valued collateral could make it difficult for Sotheby’s to sell quickly enough should these loans go into default. This risk is the price that Sotheby’s will have to pay for the USD 3.8 million in profits from the company’s Finance segment in the first half of the year…

Click here for the original story on Skate’s website

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