Why Sotheby's Shares Jumped 14% in February

By Travis HoiumMarketsFool.com

What happened

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Shares of auction house Sotheby's (NYSE: BID) jumped 13.6% in February, according to data provided by S&P Global Market Intelligence, after a fourth-quarter earnings report wowed investors. And given the company's momentum, 2017 could be a great year for the company.

So what

Revenue fell 8% in the fourth quarter, to $308.7 million, but Sotheby's swung from a loss a year ago to a profit of $65.5 million, or $1.20 per share. Management's focus on lowering costs is helping offset a decline in the art market, and it could give the stock a lot of leverage in the future if the art market picks up.

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There are a couple of high-profile auctions coming up in the next few weeks, and we'll see if that will lead to some top-line growth going forward at Sotheby's. If the top line improves, we can expect strong improvement on the bottom line given the lower cost base.

Now what

Declining costs are a big help to Sotheby's, but the stock is still expensive in today's market. Shares trade at 37 times earnings, and if the art market doesn't pick up, the company's operational performance may not live up to what the market has priced in right now. And with revenue down in both of the last two years, this may not be a stock that's worth paying a premium for right now. Declining costs are good, but it's a temporary fix, and investors will want to see more top-line improvement before getting too bullish on the company's future.

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Travis Hoium has no position in any stocks mentioned. The Motley Fool recommends Sotheby's. The Motley Fool has a disclosure policy.