Why Sotheby's Shares Jumped 22% in August

By Markets Fool.com

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What happened

Shares of auction company Sothebys (NYSE: BID) rose 22.4% in August, according to data provided by S&P Global Market Intelligence, after reporting earnings that showed some signs of improvement in the art market.

So what

Net income in the second quarter rose from $67.6 million a year ago to $88.6 million, or $1.52 per share, as cost-cutting helped offset a decline in sales. In fact, a reduction in "salaried and related" almost completely offset a 10% decline in revenue to $298.7 million in the quarter.

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Art sales can be volatile quarter to quarter, so investors have been pushing the company to cut costs and expand margins. Right now, that strategy looks like it's starting to pay off.

Now what

If management can make measures to cut fixed costs, it could put a lot of leverage on the company's bottom line if auction revenue picks up in coming years. There's been a slow art market for a couple of years now, and that's led to the pressure shares have felt over that time. At the end of the day, the top line has to improve for this to be a great investment, and until it does, I would only be cautiously optimistic about future earnings growth for the auction house.

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Travis Hoium has no position in any stocks mentioned. The Motley Fool recommends Sotheby's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.