AMDP Investment Proposal Draft

MEMORANDUM

TO:                 Clark Hansen, CEO, AMDP

FROM:           Shan Lu, Research & Development Analyst, AMDP

DATE:            July 11, 2018

SUBJECT:      An Exceptional Investing Opportunity in Heritage Auction, Inc. 

After extensive research, I, as a research & development analyst at AMDP, highly recommend the auction house Heritage Auctions, Inc. as an exceptional investing opportunity. As the world’s largest collectibles auctioneers, Heritage Auctions not only demonstrates a strong financial performance but also undertakes many social responsibilities. The company also enhances environmental sustainability by shifting most of its business online to reduce the energy consumption along with its geographical expansion. Below I will present a comprehensive analysis of the company and prove how Heritage Auctions, Inc. aligns with our four AMDP Investment Standards. 

AMDP Investment Standards

First, I want to describe the four AMDP investment standards as a supplement to my research:  

Triple Bottom Line

Triple bottom line (TBL) is a concept that measures a company’s degree of social responsibility and environmental impact in addition to its economic value (Investopedia). The following three P’srepresent the three measurements respectively: 

People: a measurement focuses on the fair treatment of employees and off-site labor, as well as enacting favorable practices in communities where companies conduct business (Investopedia). 

Planet: a measurement concentrates on the implementation of sustainable practices and the reduction of negative eco-friendly impact (Investopedia). 

Profits: a measurement values the monetary benefits and fiscal earnings of the companies with specific numbers and data (Investopedia). 

Corporate Social Responsibility

Corporate social responsibility (CSR) is a self-regulating business model that helps a company be socially accountable – to itself, its stakeholders, and the public (Investopedia). By practicing corporate social responsibility companies can be conscious of the kind of impact that they are having on all aspects of society including economic, social, and environmental (Investopedia). 

Social Enterprise

A social enterprise is an organization that is directly involved in the sale of goods and services to a market, but that also has specific social objectives that serve as its primary purpose (Investopedia). Social enterprises are not volunteer organizations in that they operate as an enterprise by selling in a market and can be registered as for-profit or non-profit (Investopedia). Profits are principally used to fund social programs (Investopedia). 

Carbon Footprint

A carbon footprint is an estimate of the climate change impact of activities such as making a product, living a lifestyle, or running a company (Clark). It is typically calculated as the total amount of greenhouse gases produced to directly and indirectly support human activities, usually expressed in equivalent tons of carbon dioxide (Rohrer). Carbon dioxide (CO2), along with other greenhouse gases such as methane and ozone, is the main cause of global warming, so the carbon footprint is a very powerful tool to understand the impact of human behavior on global warming (Rohrer). If we want to contribute to stop global warming, it is essential for us to monitor and reduce our carbon footprint.   

Company Overview

Heritage Auctions, Inc. operates an auction house for antiques and collectibles in the United States (Heritage S&P). It specializes in art, antiques, collectibles, and estate auctions (Lifschutz). It also offers appraisal services, charity services, museum and institutional services, and corporate art services (Heritage S&P). The company was founded in 1976 and is based in Dallas, Texas with an additional office in London, United Kingdom (Heritage S&P). 

Heritage Auction, Inc. is the largest collectibles auctioneer and third largest auction house in the world, as well as the largest auction house founded in the U.S. (Heritage). It is also the undisputed internet leader with more than 500 people who provide a variety of services to individual and institutional clients worldwide (Heritage). In September 2016, Heritage Auctions reached an online milestone of one million online bidder members and continued to grow at a rate of about 5,000 new members per month (Cohen). The members stem from the United States and 185 other countries worldwide with an increasing number of members from fast-growing areas in Europe, Asia, and Latin America (Cohen). 

Heritage Auctions concentrates the most market share in both online antiques and collectibles sales industry and online art sales industry with market shares of 16.7% 25.0% respectively (Cohen & Lifschutz). In 2016, the company reported $850.0 million in total company sales (Cohen). The company is expected to generate over $900.0 million in total revenue in 2018, and its industry-relevant revenue for the company is estimated to increase at an annualized rate of 0.7% over the five years to 2018 to reach $378.0 million (Lifschutz).  As a large segment of 40% of the company’s sales, Heritage’s online art sales are expected to generate $99.7 million in industry-relevant revenue (Cohen). This represents an annualized growth rate of 102.9% over the five years to 2017 (Cohen). Prior to the beginning of the period, the company acquired Greg Martin Auctions, one of the United Stats’ top auction houses specializing in antiques and historic memorabilia, contributing to growth in industry-level revenue (Lifschutz). 

                

Inside Reviews

Missions:Heritage Auctions, Inc. aims to be the world’s most trusted and efficient marketplace and information resource for owners of fine art, jewels, rare collectibles and other precious (Heritage). They believe deep, unbiased information can and should be available to all parties, transactions made more transparent, trading friction reduced, and the learning curve made less steep and less expensive for new collectors and sellers (Heritage). They highly value integrity, transparency, expertise, efficiency, innovation, and long-term perspective as their company culture (Heritage). 

Social Responsibility:the employees of Heritage Auctions and HA.com contribute to many local and national charities in mainly three ways: 

Community Services: they provide community services for 21 organizations such as Texas Scottish Rite Hospital for Children, Century Bike Ride, and Phoenix House (Heritage). 

Fundraising Auctions: They conduct fundraising auctions for 12 selected charities such as Team Cul De Sac Charity Auction benefitting the Michael J. Fox Foundation, Parade of Playhouses Auction benefitting Dallas CASA, and Doodles for Hunger Auction benefitting St. Francis Food Pantries & Shelters (Heritage). 

Auctioneers for Charity Auctions: they provide auctioneers Mike Sadler and Kathleen Guzman for charity auctions held by 19 organizations such as Dallas Museum of Art, TX, Goodspeed Opera House, Haddam, CT, and Neighborhood Coalition for Shelter, NY (Heritage). 

Outside Recognitions

Environmental Impact: founded in 1976, Heritage Auctions operated auction house in various places all around the world, which requires a very high level of capital intensity. In the early 2000s, the company took advantage of online sales business by establishing the ha.com online platform for e-transaction, which significantly reduces its capital requirements. For every dollar spent on labor, IBISWorld estimates that the average industry operator spends $0.18 on capital, which shows the relatively low costs and low energy consumption involved with developing and maintaining an e-commerce website, as opposed to traditional brick-and-mortar operations (Cohen). This business shift reduces Heritage Auctions’ use of electricity and emission of greenhouse gases.

Fairness Opinion: Heritage Auctions, Inc. is also constantly involved in social events by providing fairness opinions or appraisals for many different popular objects. In January 2018, Margaret Barrett and her colleague Carolyn Mani, specialists for Heritage Auctions, evaluated the estate in Los Angeles of Zsa Zsa Gabor, the Hungarian actress who died in 2016 (Clarke). They also inspected her glassware, jewelry, antique furniture and a collection of purses including Hermès and Louis Vuitton bags (Clarke). Involvement like this demonstrates Heritage Auctions’ value of promoting art literacy and transparency in society.

Industrial Trend: Since Heritage Auctions make online auctions possible through HA.com, many auctions rooms are sparsely attended these days despite widespread interest in the items being sold, with most bids coming in online (Grant). There are indeed some drawbacks for collectors, but none has stemmed the trend toward absentee bidding (Grant). Also, as the dominant player in the industry, the further technological development aiming at promoting convenience and safety would make the profitability of Heritage Auctions even higher. 

Recommendation: 

Overall, Heritage Auctions, Inc. is a great company to invest in for AMDP. For social responsibility, the company participates in multiple community services and charities to pay back society. For environmental impact, it shifts its business from physical auction houses to online auction platform to reduce its high capital investment and negative impact on the environment. For profitability, Heritage Auction has gained the major market share within the industry it is operating, and the prosperous industrial environment also adds the weight of its existing advantages in expansion. 

Work Cited

Clark, Duncan. “What’s a carbon footprint and how is it worked out?” The Guardians US., 4 Apr. 2012. Web. Accessed 29 Jun. 2018. 

Clarke, Katherine. (2014, Feb 1). “In the Market for Nostalgia.” Wall Street Journal (Online). Retrieved 29 Jun. 2018, from ProQuest database. 

Cohen, Anya. “IBISWorld Industry Report OD5070: Online Art Sales in the US.” IBISWorld. Sept. 2017. Web. Accessed 10 Jun. 2018. 

Grant, Daniel. (2014, Jun 15). “Why auction rooms seem empty these days; bidders aren’t lacking, they just phone it in or go online.” Wall Street Journal (Online). Retrieved 30 Jun. 2018, from ProQuest database. 

Heritage Auction. S&P Capital IQ, n.d. Standard & Poor’s NetAdvantage. Accessed Web. 28 Jun. 2018. 

Heritage Auctions.“About Heritage Auctions.” Web. Accessed 29 Jun. 2018. 

Lifschutz, Marisa. “IBISWorld Industry Report OD 5071: Online Antiques & Collectibles Sales in the US.” IBISWorld. Jan. 2018. Web. Accessed 30 Jun. 2018. 

Rohrer, Jürg. ABC of Awareness: Personal development as the meaning of life.Niederurnen: UTD Media, 2007.