In St. Joe can afford to be patient, Morningstar analyst Anthony Dayrit shares his thoughts on The St. Joe Company (NYSE:JOE) with Phil Guziec, Co-Editor and Portfolio Manager of Morningstar’s OptionInvestor research service. I’ve written about JOE previously (see The long and short of The St. Joe Company (NYSE:JOE)) arguing that it’s undervalued at present.
On an assets basis:
Guziec: So it actually brings us to how we value the company. Could you talk about the couple of ways you come up with a value for St. Joe?
Dayrit: Yeah. Well, our main valuation, it’s pretty simple is that, we take the – we’d use the net asset value and we take the roughly 400,000 of coastal acres, coastal land and assign that a per acre value of $10,000. And then we take the remaining 172,000 acres and assign that a value of $1,500 an acre and we consider that to be either rural or swampland, and the $1,500 estimate is pretty much where the land has been going – rural land has been selling for around these last few years and when we net out the liabilities, we get an equity value of $4.4 billion, which is right around our $50 fair value estimate.
Guziec: And the share is trading in the low 20s right now?
Dayrit: Yes. The share is trading at the low 20s, and at that valuation, we’d assume a per acre value of all of St. Joe’s land at roughly $3,400 an acre.
On a cash flow basis:
Guziec: Okay. Now, the land is really, for an investor, only worth the eventual cash flows that come from it.
Guziec: Could you talk about the other way that you look at the valuation for the company?
Dayrit: Sure. The other way that we’ve tried to look at St. Joe is by basically isolating the West Bay Sector. Now, there is around…
Guziec: And that’s the land around that airport that they drive at?
Dayrit: Yes. Yes. It’s around the New Panama City Airport, which has just opened at the end of May. And we take the 35,000 acres around that airport, and we assume that the company will be able to sell 700 acres per year over the next 50 years and assume that they can sell each acre for around $100,000 an acre.
And when we use that model, we get a per share value for just that West Bay project of $13, and if we take everything else of St. Joe’s land and put that into a $1,500 per acre bucket, we get an additional $9. So that also gets us to around $22, $23. And we think those are both pretty conservative assumptions.
Despite Dayrit’s assertion that the cash flow assumptions are conservative, I think Morningstar’s assumptions are pretty heroic (700 acres per year over the next 50 years for around $100,000 an acre? Ha ha ha, that’s a good one.). Those assumptions only get a valuation around the present stock price on a cash flow basis, which gives me some pause. Perhaps Jon Heller is right. Still, they’re only discussing a very small portion of JOE’s land, so I prefer the assets valuation, but I’ll bear in mind Jon Heller’s warning that “the assets need to be converted into cash in order for value to be realized”.
See St. Joe can afford to be patient to hear Dayrit and Guziec discuss JOE in more detail.
[Full Disclosure: I hold JOE. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]