So now we know what Buffett meant when he said to invest in companies that you can understand. Fannie Mae (FNM), Freddie Mac (FRE), Enron, AIG (AIG) - these are companies that not even Ivy League MBAs understand. Let’s look at a company that is much simpler: The St. Joe Company (JOE).
St. Joe was founded in 1936 in northern Florida by the famous Alfred I. Dupont. The company owns over 635,000 acres of land. Much of this land is recorded on the books at original cost, going back decades. Some of this land is prime real estate. St. Joe has 140 miles of acreage along the Gulf of Mexico and bays. Most of this is in the Red Neck Riviera: the northern part of the state.
What the company has been doing is developing this land into subdivisions. Its newest project surrounds a new airport in Panama City. This is the first international airport constructed in 15 years in the U.S. and is expected to be completed in 2010. The first phase of development includes 5,800 housing units and 4.4 million feet of commercial space.
In the boom years of real estate, St. Joe made $938,192 in revenues in 2005. In 2007, it dwindled to $377,037. Not to worry, it paid its debt down from over half a billion dollars to $54 million. The annoying thing is that it offered over 17 million shares to pay off the debt. New shares are dilutive to existing shareholders.
It looks like St. Joe is trying to hunker down for some tough times. Not a bad idea. It laid off almost 69% of its work force last year. Recently, it opened a $100 million loan facility with a bank, should it need to tap some cash.
In addition to its developable land, it owns thousands of acres of timber land. The timber is the smaller sized pine trees that one sees when traveling through Florida. In 2007, it sold 105,963 for $161.3 million. The company’s timber production is only a small part of revenues.
So what’s going to move this stock higher? Millions of Baby Boomers moving to Florida will. The Baby Boom generation was born between 1946 and 1964. The oldest Boomers turned 62 this year. This demographic makes up 80 million people out of America’s 300 million person population.
It’s true that most of these folks don’t have enough money to retire. However, many will keep on working and draw just enough to pay for expenses. If they have a home that is paid for, they might want a second home in a warm weather climate like Florida. This is what happened back in the boom days of the real estate market in Florida.
So let’s look at a few scenarios. At a market cap of $3.6 billion, the market is valuing its land at about $5,700 an acre. That’s a huge discount. Some of that land was selling for over $250,000 an acre a year years ago. So you know the company is way undervalued using a net asset value method.
But the market doesn’t care about net asset values. The market likes free cash flow and earnings. That will materialize when St. Joe can develop some of this land. It’s like someone once said, never stand in the way of a moving freight train. The Baby Boomers will be looking to retire no matter what the economy does.
So what’s the take away from all of this? Buy companies that are easy to understand, like St. Joe. When valuing a company, remember that land is carried at the original price and buildings are too (though buildings are depreciated). These hidden assets can offer nice little nuggets of value for a prudent stock picker.