St. Joe Stock Getting Ahead of Itself?

Since hitting the $27 mark in November, The St. Joe Company (JOE), Florida's largest landowner, has been on fire, hitting $47 in March before pulling back to $40 more recently. You may recall our August 7th post which questioned hedge fund manager David Einhorn's (Greenlight Capital) assessment of St. Joe and Einhorn's response, which we published word for word a few days later.

While JOE is certainly well off its bottom, and there have been some positive developments as of late, we don't see the stock breaching the $80+ level it hit back in 2005 anytime soon. While we still believe the company offers value, it may have gotten ahead of itself in the short-term.

St Joe is a bit leaner than it has been in the past, having shed its home building business, 780 employees, and it's dividend, to go along with some significant management changes. The company is now focused solely on land --not that it's a great time to be in that business, especially in Florida.

Still, JOE does own an impressive portfolio of 700,000 acres (that's more than 1000 square miles) as of February 2008, 310,000 of which are within 10 miles of the Gulf Coast. Now, as David Einhorn previously argued, not all of this is prime, quality land. In fact, during 2007, the company sold 105,963 acres of rural land for $161.3 million, an average of $1500 an acre.

Still, on an Enterprise Value to Acre basis (which puts no value on any assets other than land, and does include LT debt) that's $5100 per acre. If we assume, as in we did in our August 7th post that half of St. Joe land is worthless (which we don't believe to be the case) that puts EV/acres at $10,200. Certainly not as compelling in the midst of a difficult real estate environment, but it is if you believe there are better times ahead for Florida real estate.

In order for JOE shareholders to realize value, the company must ultimately convert its land into cash. The land -even the most rural- does have value, but ultimately, this land must be transacted. Recently, JOE has resorted to interesting (for lack of a better word) methods of doing so, offering 3000 acres in an online auction. Up for bid is land in three St. Joe properties-3,000 acres of recreational property in Gadsden County near Tallahassee, 56 acres in Port St. Joe, and 29.5 acres in Bay County near Panama City. We're not sure whether this represents desperation, or whether JOE is dipping it's toe in the water of a new potential distribution channel.

If there's been any good news lately for JOE, its been the Panama City Airport project--which is underway, and expected to open in 2010. Whether or not the airport will open the floodgates of tourists and homeowners to northwest Florida remains to be seen. But it does potentially strengthen the company's position.

Finally, St. Joe recently sold 17 million shares at $35. Secondary offerings are rarely if ever positive for existing shareholders and dilutive to earnings, but the proceeds should all but cover the company's $500+ million in debt.We don't currently hold a position in St. Joe (our shares were called in March when the stock blew past our covered write). We still like the company though, and will be looking for a re-entry point, hopefully somewhere below the current price.As for David Einhorn, we're not sure whether or not he is still short St. Joe's, but would again be willing to print a response from him.

Disclosure: The author does not have a position in St. Joe

Comments

[gaucho]

Here we have a company at ground zero for the real-estate crisis. Everybody is cheerleading that real-estate will turn by the end of the year. I do not believe that is the case. The prices are falling at an accelerated rate and the economy is going into a recession. Real-estate is at least a 7 year cycle and the latest has been up for nearly 10 years. Prices need for fall 40% on average to get back to the inflation adjusted values that have held for the last 60 years. They may in fact over shoot in their correction. So let’s assume 6 years. Then Joe must hold the bag on the real-estate that it must pay taxes on until this disaster turns around.

Given “In fact, during 2007, the company sold 105,963 acres of rural land for $161.3 million, an average of $1500 an acre.”, then Joe is worth at lot less than their current value. If you have a lot of money that you have nothing to do with for the next 10 years and you do not mind holding this company while it has negative earning and a falling share price then by all means buy.
But I will bet the overvalued stock will continue to fall and will be dead money for at least 10 years, and in fact have.

[LockstepInvesting]

I agree with Gaucho. It is hard to value a company at such a high cap when it is like a bond that only pays principal at a 10 year maturity. Land sales will be distressed income stream for at least two years. Maybe the online auction results will sober up the expectations for the company in the short term.

The key thing with this stock is that it was published in Fortune and Forbes as "contrarian" play on real estate with the "1/10 of Florida land" story. Stock pitches in major publication are always a good pumping mechanism for a small cap. But I don't think the little guys want to wait around for all of the bad news that will come over the next couple of years to see the upside.

Have any of you been to the auction site to look at the land? I think it is worth it to get a perspective. Looks like a lot of capital investment is required and liquidity for such projects is not abounding these days.

As you can guess, I am short JOE.