St Joe Review

Description
St Joe is the largest private landowner in North West Florida, owning over 550,000 acres in this region. The company operates in four segments: Residential Real Estate, Commercial Real Estate, Rural Land Sales, and Forestry.

Current situation
The company has had a lackluster record in making the transition from a paper mill manufacturer to real estate developer. This has attracted the interest of many short sellers who feel the company needs to write down projects they have on their balance sheet. Though we do not disagree with the ideas presented, we feel assets bought many decades ago are more heavily undervalued on the balance sheet then recent projects are overvalued.

The strong reduction in bank lending over the last few years has had a powerful effect on real estate prices, which have fallen strongly in the region where St Joe conduct business. As a result, sales have reduced significantly and profits have been negative for three consecutive years. We note that free cash flow is, however, positive during that period.

The need to maintain properties built and pay employees to (attempt) to sell assets imply the income statement is likely to continue bleeding until the real estate market improves. This situation could continue for a number of years.

However, we believe the large cash load and the strength of the St Joe balance sheet allow the company to survive a very turbulent number of years (net debt is negative).

The survivability of St Joe and the price being paid to purchase their land considering the current price of their stock on the equity market ($21/share) makes it an interesting ASSET PLAY proposition.

Attributes of the investment
A fear of inflation and a weakening USD can lead to more foreigners purchasing US land. St Joe is a pure, debt free, land play in the USA. As a result, in the above mentioned scenario it is likely to attract more attention than it does now. We are also comfortable holding cheap land in a strong inflationary environment relative to cash.

We are also attracted by positive moves with changes in the members of the board of directors (and changes in the executive team) and the consequential focus on reducing non core costs, as well as building relationships with skilled partners in developing new projects on their lands. They seem happier to outsource business that they are not skilled in executing. We are happy by the first developments and the recent candor presented in ST Joe´s Q1 2011 report.


What can go wrong
The company is currently bleeding due to having fixed costs and no sales. This situation can be maintained for some time by the company due to the low debt, high cash position of the company. However, if the company does not invest wisely to ensure buyers/tourists are attracted to the region, land values may not increase strongly or quickly enough before the company is forced to sell more land at undeveloped prices to meet fixed costs paid to ensure the land can be developed wisely.

This investment therefore requires confidence in managements ability to achieve this objective. For the moment we are confident with the changes we are seeing with regards to capital allocation and operating decisions for the company. We follow developments closely.

Catalysts
New management and their initiatives. Improving US economy and real estate markets. New joint venture/ partnerships with skilled and experienced partners to develop new projects on their lands. Increasing traffic at new international airport.

Why is St Joe mispriced (in our opinion)
Large fear in real estate markets at the moment (especially in Florida. We have other investments in this region related to real estate due to the current pricing available). Large short sell position in the stock from recognised hedge fund managers. Poor execution record with regards to sales relative to built capacity.