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Posts Tagged ‘The St. Joe Company (NYSE:JOE)’

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.

Morningstar’s valuations

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.

Dayrit: Yes.

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.]

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In my original post about The St. Joe Company (NYSE:JOE) (see The long and short of The St. Joe Company (NYSE:JOE) I mentioned that Jon Heller of Cheap Stocks had been a past holder. Jon has clarified his position in a post on Cheap Stocks and provided some useful comments on where he sees the value:

For the record, while I believe that there is value in St. Joe’s assets, I have not owned the name since 2008. I originally purhased shares in the mid $20’s back in the early 2000’s, watched it run past $80, and finally had the position closed at around $40.

You may recall the back and forth between David Einhorn and I that appeared on this site nearly 3 years ago. David was short JOE, while I presented the bullish case. Einhorn had a $15 price target on the stock, and JOE bottomed at $16 and change in March of 2009, so David nailed it.

The reason that I don’t own St. Joe’s now is my skepticism about the company’s ability to convert it’s land holdings into cash, and how quickly it will be able to do so given the continuing Florida land depression. The oil spill, and how it will effect the Florida panhandle, is another concern.

With 577,000 acres, St. Joes currently trades at $3518 on the Enterprise Value/Acre metric that I typically calculate for companies with vast land holdings. While that may seem very cheap,it’s not that far below 2007 ($3956)and 2008 levels ($4016).

Bruce Berkowitz, whose firm Fairholme Capital Management owned nearly 29% of the company as of 3/31, laid out the bullish case for JOE at the recent Value Investing Congress West in Pasadena. While Berkowitz is way smarter than I’ll ever be, he used a lot of the same reasoning that I did when I was a shareholder, in order to present his case. I’ve just grown skeptical.

This may be the epitome of the value investor’s dilemna: a company with extremely valuable assets, but the assets need to be converted into cash in order for value to be realized. Can St. Joe’s pull it off?

I’d be an aggressive buyer of the stock at $2000 on an EV/acre basis, in order to provide a wider margin of safety. That would put the share price at about $13. That’s a long way from current levels, and it’s doubtful that we’ll get there.

[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.]

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Further to my post yesterday on The St. Joe Company (NYSE:JOE) Chris Pavese of Broyhill Asset Management has submitted to Zero Hedge a comprehensive take on JOE:

Baron Rothschild, an 18th century British nobleman, is credited with saying, “The time to buy is when there’s blood in the streets.” Fast forward to today, and one might suggest that, “The time to buy is when there’s oil in the water.” Crisis creates opportunity for the disciplined investor, and the unfortunate disaster caused by the BP Blunder has produced one of the most compelling long term values we have ever come across. As they say, “ever” is quite a long time.

We recently watched a certain TV personality jumping up and down, like Jo-Jo The Idiot Circus Boy with a pretty new pet, and yelling at his viewers to “Sell, Sell, Sell” The St. Joe Company (JOE) after the stock had lost nearly half of its market capitalization in under two months. Viewers were told, “I know it’s got a strong balance sheet. SO WHAT! It may have acquired 477,000 acres of land in North West Florida at a very low cost. SO WHAT! . . . The risk from the oil spill is no longer a question of if, it’s not even a question of when. Now the only question is how much is this going to hurt? Could it wipe out the company??”

We’ll spare the suspense here and answer that one right up front – not a chance. The St. Joe Company has $39.5MM in debt, $27.1MM of which is offset by pledged treasury securities, and $30.6MM in maturities after 2014. The company has total liquidity of $286MM comprised of $164MM and $122MM of cash and credit facilities, respectively. A strong balance sheet may not be of much importance to speculators, but it provides long term investors with a comfortable security blanket. Not to mention, the company has 577,000 acres of land, but what’s a 100,000 acres if you’re not interested in the assets a company holds anyhow?

Later in the segment, the audience is told that, “I am not saying this company is going to go bankrupt. It’s probably not. That’s what I’m saying about BP.” We thought that last comment was particularly interesting, considering that on May 3rd, with BP trading over $50, our favorite TV personality explained that “BP’s debt to capital is really incredible” and on May 10, he told viewers that he was purchasing shares of BP for his charitable trust at just under $50. “If you get any good news at all, you’re at the bottom.”

Which leads us to our next question – why doesn’t the same hold true for JOE, a stock that is already selling at half the price it was trading at less than two months ago, with ZERO responsibility for the spill? Instead, viewers are told, “We cannot quantify the downside.” While this is certainly the case for BP, who’s costs and liabilities are rising by the day, anyone remotely interested in buying discounted Florida property, and willing to take the time to actually analyze the company’s assets, can “quantify the downside” in JOE pretty easily. At a minimum, we can get a sense for what the stock is currently pricing in. To help us determine the risk of a permanent loss of capital, we ask ourselves a few straightforward questions when considering any investment opportunity:

  1. Is the investment within our Circle of Confidence? Can we describe our thesis in one paragraph?
  2. Can we confidently estimate value in relation to price? What is an appropriate Margin of Safety?
  3. Does the business have a moat? What is the firm’s competitive advantage?
  4. Is the business run by honest and able people? Is management an efficient steward of capital?
  5. What can go wrong? How much do we stand to lose?
  6. Are we willing to invest a large part of our capital in the business?

These questions form the foundation of our investment thesis in The St. Joe Company, which is outlined below:

Buy When There’s Oil in the Water (Jun-10)

[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.]

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The St. Joe Company (NYSE:JOE) owns approximately 577,000 acres of land concentrated primarily in northwest Florida, as well as approximately 405,000 acres in the coast of the Gulf of Mexico. The stock has been pummelled by the downturn in Florida real estate and the ongoing oil spill in the Gulf of Mexico. The stock is a perennial favorite of value investors, but opinion is not uniformly positive. Bruce Berkowitz’s Fairholme is the largest shareholder. Marty Whitman’s Third Avenue is a large, long-term holder. Sham Gad is long and Jon Heller held it in the past, which lead to a fantastic back-and-forth with David Einhorn, who was short in 2007 (and may still be short). Cramer is short (or selling, at least). Why the wide divergence in opinion? A valuation of JOE turns on the value of its real estate, and arriving at a sensible estimate of value of JOE’s real estate holdings is a difficult task. Further, the damage to the coastline from the oil spill is unquantified.

The long thesis

Berkowitz, Gad and Heller’s long theses are essentially the same. JOE owns huge tracts of undeveloped land in Florida. Access to JOE’s land holdings is via an international airport, the Northwest Florida Beaches International Airport, which opened on May 23 this year. JOE donated the land for the airport and owns over 71,000 acres in the surrounding area. JOE’s 172,000 inland acres have sold for around 1,500 per acre, indicating they are collectively worth around $260M. With $150M in cash and long-term debt of $38M, after backing out the inland acres, JOE’s ~$2B enterprise value implies that the remaining 405,000 acres within 15 miles of the coastline are worth only around $5,000 per acre. Berkowitz, Gad and Heller believe that land is worth more.

For more, see Bruce Berkowitz’s thesis, Sham Gad’s thesis, and Jon Heller’s posts, which provides a link to Marty Whitman’s shareholder letter (Third Avenue has held JOE since 1990).

The short thesis

Cheap Stocks sets out David Einhorn’s August 2007 short thesis when the stock was trading at around $40:

The per acre analyses used by most St. Joe bulls exclude selling expenses and taxes. I believe that the equivalent gross value to the $9,000 an acre used in your analysis is the equivalent of $18,000 an acre, when taking expenses and taxes into account.

As it was, I did not quantify any amount of swampland at the Ira Sohn conference. I simply noted that some of the land is swampland. The weather is much worse than South Florida (just as hot in the summer and cooler in the winter), there are a lot of mosquitoes, there is not a lot to do, and the demographics are poor. I noted that I thought St. Joe overplayed the value of land within ten miles of the ocean and noted that I thought that vacationers would prefer to be “on the ocean.” More than a mile is too far for many families to walk to the beach. Finally, I thought the airport development is the type of story often seen in promotional stocks designed to buy years of time to encourage the market to ignore current financial results. The current airport does not operate near capacity. Airports in Jacksonville an Ft. Myers did not spur a lot of development next to their airports and it is odd the St. Joe seems to believe that a lot of people will want to live near the airport, as if that is a residential attraction.

As I pointed out in my speech, since 2001, St. Joe has sold 268,000 acres at an average price of under $2,000 an acre. Since my speech, St. Joe announced another quarter where they sold over 30,000 additional acres at $1,500 an acre. As such, I don’t see that it is very challenging to determine a value for most of St. Joe’s land. Assuming they haven’t sold the most salable stuff first, it appears that undeveloped land is worth on average sub $2,000 an acre before expenses.

I believe that about 680,000 of the remaining 739,000 acres are similarly undeveloped. Assuming St. Joe has no un-salable tracts of swampland and all the undeveloped land could be sold for $2,000 an acre, it would be worth $1.36 billion gross or about $700 million after selling expenses and taxes.

St Joe has just under 20,000 acres in development (some of which has already been sold). They have an additional 21,000 acres “In Pre-Development”, meaning they have land use entitlements, but they are still evaluating the development or need additional permits. They have another 10,000 acres they are planning to entitle.

The developed projects have a book value of $800 million. St. Joe is not making good margins on selling developed property. Residential and commercial land sales have not covered its overhead in any quarter since 2005, when it was still in the homebuilding business. St. Joe is one of very few companies that has spent large amounts on residential development and has not taken any impairment in the current environment. To give St. Joe the benefit of the doubt, let’s say the developments could be worth 1.5x book or $1.2 billion.

On that analysis St. Joe is worth $1.9 billion. Subtract $400 million of debt, leaves $1.5 billion of equity or $20 per share. I believe that adding in the time value of money would take this analysis down to the $15 number I used at the conference.

Cramer’s short or sell thesis is as follows:

With oil continuing to gush in the Gulf of Mexico, one obvious stock to put on the Sell Block is St. Joe, a property developer in Florida, 70% of whose properties sit on the “now imperiled coastline.” The positives just don’t matter; the company bought 577.000 acres of land at a rock bottom price, is expanding beyond luxury properties into commercial real estate and is suing BP (BP) for damages. If tar balls show up on beachfront property no one will want to buy.

If this is such a clear sell, why is Cramer singling JOE out? Because three analysts rate the stock as “neutral” and one says it is “undervalued.” Cramer has three words for that analyst: “Sell, sell, sell.”

“St. Joe down 40% off the oil spill isn’t an opportunity,” Cramer said, “it’s a falling knife and it will be able to cut you unless we get some certainty, some clarity about the scale of the damage.”

Why I am long

There are good reasons to be out of this stock. Florida real estate is synonymous with “Tulip bulb”, David Einhorn has been or is short, and JOE is, apparently, a falling knife, which sounds dangerous. Further, no one has a good bead on the value of JOE’s real estate. Einhorn is an exceptionally smart investor and, at his most charitable, valued JOE’s entire real estate holdings at $3,000 per acre. Einhorn’s short thesis is more dour. The most saleable property is worth $1,500 per acre before expenses and taxes, and a great deal of the rest is swampland. Cramer says the tar balls will push the value down further. The long thesis is simply that JOE’s real estate is worth more than $3,600 per acre (blending the inland real estate and the coastline corridor).

I’ve got no real view on the value of the real estate. I think it’s sensible to adopt Einhorn’s downside valuation as the downside valuation. Importantly, from my perspective, the downside valuation is not zero. In 2008, JOE raised $580M at $35 per share to pay down debt. Even in the worst case scenario – that the most saleable land has been sold and a great deal of the rest is swampland – JOE probably still has some value, which I’ve pencilled in at $5 (land is worth $1,500 per acre, two-thirds of it is unsaleable swampland) to $10 per share (land is worth $1,500 per acre, one-third of it is unsaleable swampland). The best case scenario is unknowable, but, because JOE has no net debt, and modest cash burn, we can hold the stock long enough to find out. The oil spill is a small concern, but BP is responsible for any clean up, either via the $20B fund or through the courts. For me, JOE represents two things: The first is a cheap bet on some longer term mean reversion in the prices for Florida real estate. The second is some shorter term mean reversion in the stock once the panic selling from the oil spill subsides. If I’m wrong, I think I’ll still get back 20% to 50% of my investment at these prices. JOE closed Friday at $22.87.

Hat tip BB.

[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.]

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