Broyhill's Bullish Case for the St. Joe Company

Below you'll find an in-depth presentation from Broyhill Asset Management on an intriguing way to play the Gulf oil spill from an investment standpoint. Hedge funds like Whitney Tilson's T2 Partners is buying oil giant BP (BP) (you can see T2's in-depth analysis of BP here). Others are buying drilling companies such as Transocean (RIG), Noble (NE), and Ensco (ESV). Broyhill, however, takes a slightly different approach. Broyhill's presentation "Buy When There's Oil In The Water" presents the bullish investment case for The St. Joe Company (JOE).

As you'll see in the presentation, the case for St. Joe starts with the fact that it owns numerous real estate assets along the Gulf coast of Florida (assets that unfortunately could possibly be in danger from the oil spill). Christopher Pavese, Chief Investment Officer of Broyhill outlines St. Joe's competitive advantage in its near-zero cost of land. He writes,

Its massive scale and low-cost basis is impossible for other developers to replicate, making JOE the partner of choice for all development activity in Northwest Florida.

Broyhill is a Family Office that was started to manage the assets of Paul H. Broyhill and has since evolved into a multi-pronged investment firm. We've previously detailed commentary from Broyhill's Affinity hedge fund with its contrarian bet on long-term treasuries. Additionally, we've covered Broyhill's ten reasons to buy bonds. And now below, we'll detail the hedge fund's latest investment idea.

Aside from its real estate assets, JOE has a pristine balance sheet with tons of cash and practically no interest-bearing debt, a much 'leaner' cost structure compared to prior years. A true investor often models and examines the worst case scenario for a given company. Broyhill has done just that, outlining a scenario where no one is really ever interested in JOE's land. In such a case, Broyhill estimates the stock is worth $15 (JOE currently trades above $25), assuming the land is sold for a paltry $2,000 an acre. To put this in context, consider that Leucadia recently paid $80,000 per acre in the same region.

The key for this company is monetizing its assets and the assumption that it will be able to do so. This play obviously requires patience on the investing end and Pavese highlights that St. Joe has some near-term catalysts already lined up. However, as the oil spill nears St. Joe's properties, the stock has become more volatile. Broyhill argues that JOE's volatility leads to opportunity. Embedded below is the full in-depth presentation on The St. Joe Company from Broyhill Asset Management:

You can download a .pdf copy here.

So while many other hedge funds and investment managers target oil companies as a proxy for oil spill plays, Broyhill has taken a roundabout approach. And, the hedge fund isn't alone in this investment either. Bruce Berkowitz's Fairholme Fund has St. Joe as one of its largest positions and has for some time. So while Pavese fully acknowledges that JOE is a slow and boring story, he is confident this unfortunate oil spill has presented a fantastic opportunity for the long-term. For more from Broyhill's Affinity hedge fund, head to its contrarian bet on long-term treasuries as well as its ten reasons to buy bonds. Stay tuned tomorrow as we'll be covering Broyhill's latest market commentary as well.

Original article

Comments

[j_remington]

I will have to be short term bearish on JOE until eoy. Long term (if you have a 2-3 yr horizon it will trade to $30-$35)

[Deepv]

Joe EV/acre about 3oz gold today vs 10-12 in 2000, pre bubble. Land hasn't changed and neither has the gold.

[CBTeas]

I can't tell you how many people have been burned with simplistic land sale models. Just ask CalPERS about their investment in LandSource. Though CalPERS made this investment near the top of the market, it is important to point out that LandSource was much closer to a major metropolitan area than the land holdings of JOE. In theory, LandSource should be easier to value than the multi-decade acreage of JOE.

Two areas where the JOE analysis falls down: (1) future infrastructure costs have to be paid up front, while the land sales that follow happen over 10, 20 or more years. (2) The other problem is that JOE is not done "giving away acres" to win entitlements. In fact, the more this area gets built out, the more the NIMBY homeowners will fight with JOE on future density.

BTW, the fact that JOE owns the land for next to nothing is not relevant. The question is, what are YOU paying for the land-- based on what you pay for the stock?

We should applaud JOE's paying off debt and having a clean balance sheet--this is a good way to fight the current slow land sales environment. But don't forget to add the fact that every 3 years or so, you have major hurricanes that also slow down land sales. And with a gulf full of oil, a major hurricane that travels from west to east in the Gulf may dump lots of toxic rain on JOE's acreage.

When you add all these realities together, JOE is a name that is perpetually over-valued by its investors. Good luck with your investment in JOE.

My sense is your IRR will not be as good as you think. (BTW I am not short JOE, but I have evaluated it many times)