What's going on?

Profits at famed auction house Sotheby�s jumped more than expected in the final quarter of 2016. After hearing the news on Monday, investors sent its stock price up 15%!

What does this mean?

The art and collectibles market was not so hot this time last year, but the market stabilized in the latter half of the year, and Sotheby�s benefited as a result. The company has done some smart things to improve its own prospects. For one, it�s diversifying into advising collectors about their art and acting as an agent for contemporary artists (which is what commercial galleries typically do).

Why should I care?

The bigger picture: A lean operating model can be a powerful driver of profit in a recovering industry.

Since Sotheby�s is an auction house, its fixed costs are relatively low: it doesn�t have huge, expensive manufacturing facilities to maintain, for example. And its costs are pretty much the same whether a painting fetches $1 million or $10 million. So, if the art market were to keep recovering, Sotheby�s (and other auction houses) are very well placed to benefit from it.


For the market: Sotheby�s has been buying its own shares, which flatters its profits.

Profits are often reported as �earnings per share� (EPS) which, essentially, is the amount of money made for each share in circulation. A company can buy back its own stock � and many do � to take shares out of circulation. This increases its EPS even if actual profits stay flat (because the profits are spread out across fewer shares). This is what happened to Sotheby�s when it bought back a huge amount of its own stock in 2016. With stock buybacks, shareholders benefit from upward pressure on the stock price and from owning a comparatively bigger slice of the company. But some argue companies should invest that money in new initiatives instead of buying their own stock.