St. Joe's Defense: Weak At Best

Sep.19.07 | About: St Joe (JOE)

The St. Joe Company (NYSE:JOE) saw its stock price bottom at $30.5 three weeks ago, before rebounding to $36 as of yesterday. Even now the stock price is trailing by about 15% from its August 8th high of $41.21. This fluctuation, all within a timeframe spanning three weeks, piqued our interest since we had made a trade in the recent past. During this period, there were three different press releases, all on the company's land development operations. The combined outlook from all of them can be labeled as mildly positive.

In May this year, at the Ira Sohn Research Conference, David Einhorn, a hedge fund manager at Greenlight Capital pinned the value of JOE at $15 per share. Clyde Milton, a fellow blogger published a bullish report on JOE in August paving way for a debate with David Einhorn who defended his position. Seeking Alpha published both these articles and the unwelcome attention caused the company to come up with its own defense on September 13th. It was in the form of a very odd press release. The release structured as an FAQ portrays North West Florida as a growth area, defends the value of wetlands, and touts JOE's experience in getting land-use entitlements as a competitive advantage.

The bullish article projects the company as an asset play and justifies the valuation by indicating that $9000 per acre is a reasonable valuation for North West Florida land alongside the ocean. The bear on the other hand uses the divide and conquer approach. Its evaluation splits up the company's portfolio into developed and undeveloped acreages and values each asset separately. The bear's calculation gets more credit for accuracy as it takes into consideration not only the cost of selling the land but also the time value of money.

There is merit in considering JOE as a real business as opposed to an asset play and coming up with a net present value [NPV]. At the minimum, JOE's business can be considered as realizing cash flow from a depleting asset. Giving a disposal rate of 40,000 acres per annum for the undeveloped acreage, the life expectancy of the business is 18 years. Assuming a sale price around $2000 per acre in the first year, the revenue would be $80M. For such a business, the margins will be very high as there is not much value added. An estimate of 80% is reasonable and the business will realize $64M free cash flow for 18 years. This is on the assumption that additional incomes and expenses over the years cancel each other out. The present value of this cash flow from an NPV calculator is $513M or around $7 per share (taking 7% as the discount rate). For the developed acreage, the book value is $800M. Assuming JOE can sell this acreage at 1.5 times book value (net of all expenses) over a period of 5 years, the NPV of this cash flow stands at 1.05B or $14 per share. JOE has debt of $400M or around $5.5 per share. This essentially brings the total value of the business to around $15.5 per share. This is less than half of today's closing price. A factor that has to be considered is whether management can add value by better asset management. Given that the margins realized by active management is fairly low, any value added should be considered negligible or negative.

All this leads to the fact that JOE as a long-term investment is not a good option!

Disclosure: none