A Sotheby’s Challenger? MCH Group, Owner of Art Basel Fairs, to be Included in Skate’s Art Stocks Index

April 26, 2010

Last week Basel and Zurich-based MCH Group published its annual report for 2009. The firm endured its second consecutive year of declining revenues, EBITDA and net profits, and although it complained about the negative economic outlook, it did express general satisfaction with its financial results given that its core products – Baselworld (watches and jewelry) and the two Art Basel fairs (in Basel and Miami Beach) – did very well in adverse market conditions. This sounds familiar, right? When stocks and bonds were all in turmoil, art and gems preserved their value quite well. Things look similar with Switzerland’s largest exhibitions and events management firm.

At first glance, MCH Group is a strange choice for an art industry stock. The firm calls itself a “global live marketing” business, and none of its management or board members has a background in the art world; luxury goods is as close as it gets (absence of art world background applies to management of MCH Group as a whole; the management team at the Art Basel fairs has impeccable art world credentials). Although the firm has made an effort to diversify in a number of directions – from purchasing and building more exhibition space to offering all kinds of products and services within the field of events management – these attempts have not really worked so far. MCH Group’s exhibitions contribute to a growing percentage of the company’s operating income, 73% in 2009 versus 67% in 2008. Excluding consumer shows, Art Basel and Art Basel Miami Beach are the 2nd and 3rd largest events in terms of number of visitors for MCH Group. And the #1 MCH Group event in terms of visitors (excluding consumer shows) is Baselworld, which has a largely similar end-customer base as the art market.

Given the towering presence of events serving the art market in MCH Group’s top-line and bottom-line financials, as well as the growing importance of Art Basel as an art marketplace, we have decided to treat MCH Group as an Art Stock going forward….

To read the full article, please visit Skate’s Art Market Research.

Russian and Chinese Works Shine at Phillips de Pury’s BRIC Auction

April 26, 2010

In many ways, this past weekend’s auction of contemporary art from the BRIC countries (Brazil, Russia, India, China) at Phillips de Pury London passed without any great surprises. As predicted in numerous media reports and the auction house’s own presale estimates, Russian artist Erik Bulatov’s ENTRANCE—NO ENTRANCE (1995) was the top lot with its final sale price of £713,250 ($1,095,480), including buyer’s premium. Unsurprisingly, works by Russian and Chinese artists sold well, vastly outperforming the limited number of works by Brazilian and Indian artists (three and eight works, respectively).

What was particularly interesting about the BRIC sale, however, in the footnotes to the optimistic headlines, were the prices for the Chinese artists…

To read the full article and comment, please visit Art in America.

Watch the Chinese Artists – Especially Yue Minjun – at Phillips de Pury’s BRIC Auction

April 22, 2010

Yesterday, Simon de Pury was featured on a Bloomberg video discussing this coming weekend’s first ever auction devoted to contemporary art, design and photography from the BRIC region, which will be hosted at the Saatchi Gallery in London.

While Russian artist Erik Bulatov’s ENTRANCE — NO ENTRANCE (1995) is widely expected to be the auction’s top lot – estimated to sell between £350,000-450,000, the Chinese sales will be particularly interesting given the huge hit that Chinese contemporary art has taken in the wake of the global financial crisis. According to Scott Reyburn’s article yesterday in Bloomberg – “$20 Million Sale at Saatchi Gallery Rides China, Russia Booms” – “prices of high-value Chinese contemporary works fell 70 percent during the financial rout from a peak in May 2008.”

We have noticed the same trend, although this spring there have been signs that the market has stabilized and could be in for a period of more restrained (i.e., healthy) growth.

Take, for example, the artist Yue Minjun, widely regarded as one of China’s star contemporary artists. After riding the boom in Chinese contemporary art that saw two of his works enter our list of the Top 1000 – Gweong-Gweong and Execution – Minjun’s works have brought considerably lower prices at auction.

Several weeks ago, On the lake – a prized 1994 work created just after the artist had settled upon his signature of style of repeated smiling faces – sold for HK$14,660,000 ($1,888,208). Although it sold for more than 40% above Sotheby’s high estimate, its price was well short of the records set in the painting’s peer group. In fact, the final price realized for On the lake was almost exactly in the mid-range of the peer group we discussed in our pre-auction analysis.

In other words, Minjun, and arguably the Chinese contemporary fine art market in general, is showing signs of normalization.

This Saturday, one of Minjun’s works from the 99 Idol Series – 99 Idol Series No. 73 - is being auctioned with an estimate of £30,000-50,000 ($46,090-76,817), which is right near the average of where works from this series have previously sold at auction. Works from this series have traditionally done well relative to pre-auction estimates, although three of them with aggressive estimate ranges failed to find buyers at Christie’s in December 2008 and May 2009. We can only assume that Christie’s reserve prices were simply too high, failing to take into account the reality of a correcting market.

Phillips de Pury, on the other hand, seems much more in tune with what the market will bear these days, which leads us to presume the entire sale this weekend should be quite a success.

The Ultimate Bubble Stock – Really?

April 14, 2010

As we wrap up our coverage of the art stocks’ annual results for 2009, we’ve been looking to see what others have been writing about the companies we cover.

In his recent post, “The Ultimate Bubble Stock Is Going Nuts Again,” Joe Weisenthal says that Sotheby’s is “the ultimate bubble stock, moving violently up and down throughout its history, always making super-sharp peaks right before the economy becomes unglued.”

Mapped against an underperforming and lackluster DOW over the past decade, yes, Sotheby’s appears to be a bubble. But what Weisenthal and other skeptics ignore are the solid fundamentals behind the share price surge.

  1. Greater geographic diversity of clients and products – Sotheby’s has seen enormous expansion into Asia in recent years, where real economic growth is well underway. Regional auctions (i.e., Hong Kong) are now some of the company’s most exciting and the region’s buyers some of its most important.
  2. Credible cost control in place – Sotheby’s learned its lesson in the wake of the sharp downturn in the art market following the global financial crisis. In Q4 2009, expenses were cut 28%. See Sotheby’s announcement for a full overview.
  3. Scarcity value – anyone who wants investment exposure to the art market without investing in actual art has little choice but to invest in Sotheby’s. Of the eleven art stocks tracked by Skate’s, Sotheby’s is by far the largest and most dynamic.
  4. Spring auction excitement – A big part of the reason behind the current stock surge is that Sotheby’s, put quite simply, is going to make a lot of money this spring on its major sales of Impressionist, Modern and Contemporary art. Catalogues featuring exciting lots are being released as we write.

artnet’s 2009 Results and Strategic Proposition: Bear with Us, Losses from Online Auctions Will Eventually Bring Profits (by 2011 at the Earliest…)

April 12, 2010

artnet Makes its Most Detailed Public Disclosure Ever, Has Sufficient Cash on Hand to Continue Experimenting with Online Auction Business

artnet recently published its 2009 annual report, and our first impression is that it looks very much like the reports Sotheby’s produces – lots of pictures, nearly 100 pages in length and very detailed financial disclosures. The numbers, however, are far less impressive than the presentation.

In November, we previewed artnet’s 2009 results in detail when the company released its nine months report. The big picture has changed very little in the time since:

  1. The firm’s revenues are down 5.6% compared to 2008 (in dollar terms) to approximately $17mln. To put matters in perspective, this figure is approximately three times the annual catalogue sales at Sotheby’s;
  2. artnet has lost money at a stable rate for two years now, with net losses approximately $0.7mln for the second year in a row. Its cash position fell from $4.1mln to $3.1mln in 2009, and the firm remained unleveraged;
  3. The company’s cash flow from operations went from a positive $0.66mln in 2008 to a negative $0.26mln in 2009;
  4. The firm’s capital expenditures fell to $0.65mln in 2009, about one third the level of 2008;
  5. The auction segment continued to weigh down on the company and was responsible for its losses. The auction segment losses widened from EUR1.3mln in 2008 to EUR1.8mln in 2009 and exceeded the roughly EUR1.3mln in profits made by the firm’s other business segments. The auction segment was solely responsible for artnet’s overall loss in 2009.

artnet remains undeterred, however. In his outlook for 2010, Mr. Hans Neuendorf, the firm’s founder and CEO, sets a target for artnet to double its online auction revenue in 2010 and expects the firm to return to profitability in 2011. As a side note, with this report artnet has become quite transparent about its directors’ compensation and stated that Mr. Neuendorf was given EUR528,000 in total compensation in 2009, which is roughly equivalent to firm’s net loss for the year.

artnet’s bet on online auctions is controversial. On the one hand, we admire the company’s strategic and long-term focus, conservative guidance, model transparency (its financial disclosures are now second to Sotheby’s among the listed art industry companies) and ability to grow auction volumes as projected – the size of its auction business more than tripled from EUR255,000 in 2008 to EUR815,000. If online auctions do indeed double in size in 2010 as artnet projects, then they could overtake advertising as the firm’s third most important business segment (after the gallery network and price database).

On the other hand, we remain very skeptical of this strategy choice. artnet has a natural advantage in the data and media segments and could easily have pushed for more sophisticated and value-adding products and services on the transaction-vetting side, for example. Instead, artnet allowed a significant decrease in the margins of its gallery network and advertising segment by concentrating its Capex, financial and management resources on the online auctions strategy. Online auctions represent a very competitive space occupied not only by numerous auction houses with their own online offerings, but also by a variety of high-growth firms like Art.com and Auction Holdings that are funded by private equity. Clearly, eBay is intent on remaining a player in the field for lower-end art pieces, a niche where artnet’s auction segment has thus far been constrained.

Moving into the field of art trading also turns artnet from a strategic partner of companies like Sotheby’s, Christie’s and multiple art fairs into their competitor. The firm should pay attention to the costly litigation that erupted earlier this year between Christie’s and its primary rival, Artprice. artnet should develop a contingency plan in the event that its online auctions suddenly begin to generate meaningful volumes and tempt the auction houses into considering some form of retaliation. The fact that artnet’s most profitable segment, its price database, is based on auction price data could offer the auction houses a nice weapon to deter artnet’s expansion into the higher-value trading segment. Of course, today artnet remains a distant and unlikely threat to the established auction trade. After two years of investment and operational losses, the firm’s annual gross revenues from its online auctions are less than what Sotheby’s and Christie’s generally collect on the sale of a single painting featured on the cover of a major spring or fall auction catalogue.

Investors seem to share Skate’s skeptical view of artnet’s online auction strategy; the firm’s share price has clearly decoupled from Skate’s Art Stock Index, which has surged since the clear return of excitement (and volumes) to the art market this past winter. Driven by Sotheby’s stellar share price performance, Skate’s Art Stock Index is up over 30% on year-to-date basis, while shares of artnet (and Artprice, which reported much worse 2009 financial results) remain in negative territory this year.

Skate’s believes that artnet’s share price will remain depressed at the $6-7 level unless the firm manages to produce a significant improvement in the profitability of its online auctions or becomes the subject of a hostile takeover play.

For the full story, including related data, please visit Skate’s Art Market Research

Skate’s Gives Stamp of Approval to Collectibles Underdog: Stanley Gibbons is Art Stock of Choice for 2010, Target Price Raised to £2 per Share

April 7, 2010

Stanley Gibbons, the world’s leading company serving the stamp collecting market, published its 2009 financial results last week. The firm had a very good year by every account: its revenues increased by 20% (to nearly £23.4 million in 2009), earnings per share grew by 11% (to 14.7 pence per share), cash position improved from meager £0.5 million at the start of the year to £3 million as of December 31, 2009, and the firm is debt free.

Perhaps the most important takeaway from the company’s 2009 results is Stanley Gibbons’ apparent discovery of a highly profitable business model – the firm generated £4.9 million in cash from operations, a massive increase from the £0.6 million achieved in 2008.

We will analyze this business model in detail further below, although suffice it to say that other art and collectibles businesses should pay attention to Stanley Gibbons integrated trading and information approach with its heavy focus on internet and global expansion.

As the firm is now traded at a PE of less than 9 and has a robust outlook in terms of growth and profitability, we believe that shares of Stanley Gibbons are currently undervalued at £1.4 per share. We believe that there is a nearly 50% upside potential, which leads us to increase our target price to £2 per share. We are particularly confident in this forecast as we look at the historical performance of Stanley Gibbons share price against Skate’s Art Stocks Index. The decoupling of Stanley Gibbons from the general index trade that we have observed since the end of October seems completely unjustified given the company’s strong 2009 financials.

Stanley Gibbons: Business Case

Stanley Gibbons operates three business divisions. Of these, philatelic trading and retail is by far the largest. In the highly fragmented world of stamp collecting, Stanley Gibbons is the only listed company and perhaps the largest operator in terms of volume (the company estimates that there are 60 million collectors worldwide with the global stamps trade – including postal needs – amounting to approximately $10 billion a year or anywhere between 15% and 25% of the global art trade1).

The firm has become increasingly dependent on the stamps trade for its revenues and profits over the last three years; in 2009 it derived over 75% of its sales from this segment. While it remains the least profitable of the three, stamp trading is by far the fastest growing part of Stanley Gibbons’ business and continues to command solid operating profit margins that greatly exceed 20%. Managing growth in this segment remains the key to shareholder value creation at Stanley Gibbons, a topic we detail further in this report.

The other two other business segments – publishing / accessories and autographs / memorabilia – posted no organic growth in 2009 (the publishing division numbers include results from Philatelic Exporter, which was acquired in January 2009). Both experienced a faster decline in profit margins than the core philatelic trading division. As the internet continues to redefine how collectors make trades, it will create more opportunities for Stanley Gibbons’ stamp trading division but will challenge its publishing and to a certain extent its memorabilia business. We see no growth opportunities in the publishing segment, although we do recognize its importance as an authoritative source of vetting services for stamp collectors. We believe that Stanley Gibbons must narrow the focus of its memorabilia-trading segment given that it operates in the highly competitive space of multiple online auctions and specialty internet trading operations around the world.

Managing Growth and Working Capital is Key to Stanley Gibbons’ Future Success

As Stanley Gibbons managed to achieve 28% y-t-y growth in its core philatelic trading operations in 2009 and is clearly on the way to sustaining this growth in 2010, managing working capital becomes the company’s major challenge.

A classic concern of any expanding trading business involves exercising discipline when it comes to working capital. This is also an issue with Stanley Gibbons. The firm did very well on the inventory side – it actually managed to reduce its inventory count by 21% in 2009 against the backdrop of growth in sales. An area of concern, however, is the firm’s receivables, which ballooned from £4 million to £9.9 million in 2009. All in all, the firm’s working capital (inventory plus receivables) remains fairly significant (growing from 81% of sales in 2008 to 82% in 2009). We will watch for the following key decisions in working capital management during the course of 2010:

  1. Use of leverage – in an environment of consolidation and growth, we would encourage Stanley Gibbons to use leverage and unlock the firm’s own capital to finance acquisitions and further growth rather than finance working capital requirements;
  2. Quality of receivables – we will watch for bad debt write-offs in the company’s future financial reports as an indication of how prudent the company’s accounts receivables policy is; and
  3. Inventory management – we will watch whether Stanley Gibbons can continue keeping its inventory at 6 months of sales from the philatelic trading unit throughout 2010. We will interpret any increase in this ratio as a clear red flag indicating mismanagement of working capital, especially if accounts receivable remain as high as they are now.

Growth Plans

Stanley Gibbons has ambitious growth plans that include significant improvement of its public relations, sales and customer service, as well as geographic expansion. China seems to be a major new market for Stanley Gibbons, one where the firm sees a third of its potential customers residing. The company also plans to exploit a distribution channel focusing on stamps as an investment. Finally, it plans to upgrade its online offering and acquisitions.

We believe that emphasizing growth is the right move for Stanley Gibbons at this time (including the previously discussed switch to debt financing of working capital requirements and the use of own capital for more expansion opportunities). We believe, however, that the firm must be very cautious with its growth opportunities and should pick its battles carefully. A few considerations:

  1. Online strategy – this should be the key strategy for the firm going forward with an objective of solidifying its already highly successful website as the #1 destination for stamp collectors around the world due to the vetting functionality offered by the catalogues and depth of price data. We believe that making the site multilingual and offering more functionality for stamp collectors and dealers is the #1 priority for the firm, and we will watch for delivery here.
  2. Geographic expansion – is generally the right thing to do, and we would encourage the firm to export its successful UK model (flagship store, robust online trading offering and in-depth catalogues) to other markets. However, we would be skeptical of any significant capital outlay for geographic expansion that suggests a departure from this proven business model.
  3. Memorabilia – this business activity lacks focus on the “contents” side. Stanley Gibbons is not an obvious destination to shop for celebrities’ autographs and collectibles unless it is somehow tied into stamp collecting (or any of the firm’s other competitive advantages). We would be skeptical of any significant investment in this space unless there is a clear strategy presented for a market that is otherwise served well by eBays of the world.
  4. Publishing and accessories – we do not see this business as a strategic interest in its own right, but we do recognize its importance as an add-on to the philatelic trade. Therefore, all the expansion on this side must be balanced with quick payback on the stamp trading side.
  5. Stamps as an investment – Stanley Gibbons recently spoke out too forcefully on the topic of stamps as an investment with discussion about launching a rare stamps fund. We have seen this before with art funds, and clearly the jury is still out on whether there is a place for collective investment in collectibles. We would be skeptical about any significant growth from a distribution channel focused on stamps as an investment and will continue to look at Stanley Gibbons as the most attractive specialty online trading and retail service for stamp collectors, regardless of the reasons for their attraction to stamps.

Investment Summary

Stanley Gibbons stock is the only way to invest in the stamps industry around the world. Provided the firm continues to play its cards right, it will accumulate a unique global database of stamp collectors and traders – a resource that can clearly be mined for more than simply encouraging people’s stamp collecting hobby. Up-selling stamp collectors to art, books or coins is one of potential proposition and thus Stanley Gibbons is a perfect acquisition target for all the global online auctions and well-established art auction houses and booksellers.

We believe that as long as Stanley Gibbons remains focused and continues to consolidate the stamp collecting industry, it will offer significant growth opportunities to investors and an easy exit.

We like the firm and believe that it should be worth close to $100 million by the end of 2010, which is double its current market capitalization.

For the full story, including related data, please visit Skate’s Art Market Research

1 Depending on which measure of the art market one uses – see Skate’s Market Notes from March 5, 2010. Stamps are not considered to be part of the art market but rather a separate collectibles market.


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