The Bull Case for St. Joe Company

| About: St Joe (JOE)
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By David Alton Clark

The St. Joe Company (NYSE:JOE) is a real estate development company. The Company owns approximately 577,000 acres of land concentrated primarily in Northwest Florida. St. Joe is engaged in town and resort development, commercial and industrial development and rural land sales. It also has interests in timber. The Company operates in four segments: Residential Real Estate, Commercial Real Estate, Rural Land Sales and Forestry.
Current Events
On Friday afternoon, a news alert was issued by CNBC stating Bruce Berkowitz was named Chairman of St. Joe Company. I called Mount & Nadler, public relations counsel to Fairholme Funds, and asked Hedda Nadler for a statement regarding the news. Nadler stated "The news is true, Bruce is going to be Chairman. The 8K was leaked, this is not the way Bruce wanted the news to be shared. Bruce will be making a formal statement regarding these developments next week." Shortly after our conversation the 8K was posted confirming the news that Berkowitz was named Chairman. The writing was on the wall based on events earlier in the week. Even still, the stock popped 2% within seconds of the news airing on CNBC.
The turmoil regarding St. Joe's board started after a struggle for control of the company which pitted Berkowitz against other members of the board. Berkowitz stated "We cannot continue on this course for long or there will be no Joe. Starting today, we will not continue down this road," Berkowitz said "I know change is painful, but the seeds of greatness are planted during tough times." Berkowitz is the founder of Fairholme Management Capital LLC, the largest shareholder of St. Joe Co. stock. Additionally, St. Joe's board has terminated a shareholder rights plan, or "poison pill". The plan was enacted by the board to rebuff a potential takeover attempt when Berkowitz requested shareholders replace the board on an earlier date.
St, Joe's stock price rose to a high of approximately $80 per share in 2005 during the height of the real estate boom. It was trading at $55 per share by 2007 before the 2008 real estate debacle, which saw the shares drop to $15 per share at the market low in 2009. Currently, St. Joe's stock is trading at approximately $27, about the same as one year prior. I suggest you review a recent article written by Todd Sullivan to gain an in-depth picture of St. Joe's current assets.
With the 'Poison Pill" dissolved along with the prior board, Berkowitz as the new chairman, and board seats filled with new executives, what can St. Joe shareholders expect? My thinking is good things. Let's review a Bull Case for St. Joe.
St. Joe's Bull Case Major Elements
Prime Land Positions - St. Joe is a housing and resort developer. The company owns 574,000 acres in Northern Florida, approximately 70% within a few miles of the Gulf of Mexico. In real estate there are a few quotes that stand the test of time. "Don't wait to buy land, they aren't making any more of it." - Will Rogers, "The major fortunes in America have been made in land." - John D. Rockefeller, "It's tangible, it's solid, it's beautiful, and I just love real estate." - Donald Trump. These statements highlight the value of owning real property and hard assets as wealth creation vehicles, there is no disputing this point. Although, there are inevitable booms and busts in real estate. Fortunately, we are now emerging from the latest bust, giving buyers the opportunity to purchase St. Joe's stock at $27 rather than $80. You must buy low to sell high.
Berkowitz states "St. Joe holds a great deal of property along the Gulf coast and the company is sitting on fertile ground for lucrative resorts and is undervalued." I agree with him. Real estate values are cyclical, otherwise we wouldn't have terms like boom and bust. St. Joe has almost no debt, allowing Berkowitz time to unlock the intrinsic value of the company's assets. We have made it through the bust, I'm betting the next thing coming is the boom. St. Joe's stock priced at these levels offers an excellent entry point to participate in this opportunity.
M & A & Joint Venture Activity - By Berkowitz disintegrating the board and the poison pill with it, he has paved the way for a possible take out by a company flushed with cash and looking for a deal, as many are coincidently. St. Joe said it hired Morgan Stanley to explore options to boost shareholder value, including a merger or sale. Berkowitz owns about 29 percent of St. Joe and proposed former Florida Governor Charlie Crist as a director. In an interview on CNBC’s Fast Money Crist stated "Bruce Berkowitz is not looking for a proxy fight rather he’s advocating democracy.” Crist added ”What Bruce wants to do is make sure the company is run well and make sure its run with the shareholders interests at heart, that’s what the concern is, doing what’s right for the company and the shareholders who own it.”
Crist is an excellent choice by Berkowitz to join the team. Crist brings a wealth of knowledge regarding Florida, strong relationships, and will be an excellent advocate for St. Joe going forward. His involvement was a key factor in my decision to go long on St. Joe. With billionaire value hunters the likes of Warren Buffett on the prowl, who recently stated on CNBC's Squawk Box, "The economy is improving and my elephant gun is loaded." and Charlie Crist on St. Joe's team, I have confidence Berkowitz will create shareholder value.
Current Financial Results vs. Stock Performance - St. Joe is showing strength in earnings per share growth, revenue growth and maintains a solid financial position with reasonable debt levels. St. Joe had a net loss of $2.7 million in the latest quarter vs. a loss of $58.7 million a year before. Pretax charges were $10.7 million rather than $84 million. Revenue was $37.1 million in the fourth quarter. Sheila McGrath, an analyst with Keefe Bruyette & Woods Inc. in New York, stated "The quarter had a meaningful pick-up in residential activity,” McGrath went on to say “This report, with liquidity preserved and residential pick up, should be met with some relief.”
St. Joe recently closed at approximately $27 per share, basically unchanged from the closing price one year earlier with much improved financial results. St. Joe's debt to equity ratio is nominal at 0.06. Additionally, CNBC quoted a source saying "St. Joe will announce both commercial and residential real estate joint ventures and cost cuts that could total up to $60 million dollars." The bottom line is the company has a much improved income statement, a great balance sheet, and a Chairman at the helm with skin in the game. The stock price has remained depressed for the last year, I believe the company is at a key inflection point and the stock performance is about to change in a positive way.
Short Squeeze Play - Currently 27% of St. Joe’s float is short. Noted hedge fund manager, David Einhorn is on the record stating "the company needs to take substantial asset-impairment charges." Einhorn said he has a short position in the stock. Einhorn states "St. Joe is dead because It can't build, it can't sell, and it can't generate value to cover the operating costs." Berkowitz rebuffed these statements saying "I'd buy the whole company if I could." Bruce Berkowitz has a reputation as one of the most successful investors of the past decade. If his track record is any indication, there is a good chance he will create value for shareholders. “I still believe St. Joe has tremendous value to unlock, but you have to have the right people to unlock it,” said Berkowitz, he went on to say “I do not regret our St. Joe investment. I’m still quite optimistic.”
The stock popped 2% on news that was baked into the stock due to telling events earlier this week. If the uptrend continues, its price may escalate quickly as the short sellers attempt to buy back the stock to cover their short positions before the trend becomes parabolic. There are certain investors who look for stocks with these characteristics and rapidly buy the shares to induce a "Short Squeeze". One issue with selling short is that your losses could potentially be infinite. As Warren Buffett says "Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well." I'd say this is one of those times.
In finance, a contrarian is one who attempts to profit by investing in a manner that differs from the consensus, when the consensus opinion appears to be wrong. A contrarian believes that certain crowd behavior among investors can lead to exploitable mispricings in securities markets. For example, widespread pessimism about a stock can drive a price so low that it overstates the company's risks, and understates its prospects for returning to profitability. Identifying and purchasing such distressed stocks, and selling them after the company recovers, can lead to above-average gains. I believe this is the case with The St. Joe Company, and some major market players agree.

Disclosure: I am long JOE.

Additional disclosure: These are my personal opinions regarding the market conditions and the stock. Company information was gathered from