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Sotheby's surges as quarterly results top expectations

Visitors take a picture in front of a pictures of David Bowie and beside by one of the artworks (L) he owned named BEAUTIFUL, SHATTERING, SLASHING, VIOLENT, PINKY, HACKING, SPHINCTER PAINTING' by British artist Damien Hirst, at Sotheby's in London.
Daniel Leal-Olivas | AFP | Getty Images
Visitors take a picture in front of a pictures of David Bowie and beside by one of the artworks (L) he owned named BEAUTIFUL, SHATTERING, SLASHING, VIOLENT, PINKY, HACKING, SPHINCTER PAINTING' by British artist Damien Hirst, at Sotheby's in London.

Shares of Sotheby's surged as much as 22 percent Monday after the company's earnings and revenue topped analysts' estimates.

The auction house earned an adjusted $1.51 per share for its latest quarter, well above estimates of $1.05. Revenue of $298.7 million also beat forecasts of $291 million, despite lower sales in the global art market. Sotheby's stock later erased some gains, and ended the day up about 13 percent.

"While we would certainly prefer to see a stronger art market, we are pleased with the progress we have been making on our strategic initiatives and the beneficial changes to our team and organization," said Tad Smith, Sotheby's CEO in the company's quarterly release. "When the art market improves – and it certainly will – our company is poised to do very well for shareholders. Until then, we continue burnishing Sotheby's for even more success and being very careful on capital allocation."

The auction house is facing a fresh round of activist pressure. Last month, a Chinese life insurance company run by the grandson-in-law of Chairman Mao Zedong disclosed it bought a 13.5% stake in Sotheby's, citing a "positive view" of the auction house and potential interest in a board seat.

The move makes Taikang Life Insurance Co., one of China's biggest insurance companies, the largest shareholder of Sotheby's, eclipsing stakes held by hedge-funds. Third Point's Dan Loeb owns 11.38 percent, and Point72 Asset Management's Steven Cohen owns 5.5 percent, according to Reuters.

According to Cowen analyst Oliver Chen, Sotheby's could outperform the firm's $28 price target based on acceleration in Asia GDP growth, competitive pressures in global art, less margin erosion, and strong cost management driving lower-than-expected expenses.

On the flip side, Chen says the auction house could underperform based on a global slowdown in the art market, lower than expected auction sales and commissions, and weaker operating margins. Cowen rates Sotheby's stock as market perform.

On the company's conference call, when asked about positive catalysts for demand, CEO Smith pointed to two unlikely sources: the U.S. presidential election and Brexit.

"I think it (the U.S. presidential election) will be an interesting and positive catalyst for our many businesses and honestly probably for a lot of other markets as well." Smith said on the conference call. "If you see the absence of bad news, related to any further instability in Europe, I think that would be a positive catalyst, meaning Brexit seems to have been largely absorbed and as long as there is not more noise about Europe, I think it would be a positive."

Shares were on pace for its best daily performance since April 1999 when it gained 23 percent. The stock has gained more than 41 percent year-to-date, which puts it on track to break a 2-year losing streak.

—Reuters contributed to this report.