Thursday, August 02, 2007

What's Wrong with JOE?

We last featured Florida land giant St. Joes(JOE)this time last year when we compared it to the New Jersey island on which we have a summer cottage. At the time, we surmised, our island was terribly overpriced compared to St. Joe's. If there was a way we could have shorted our beloved little island (without selling our cottage, that is), and used the proceeds to go long St. Joes, we would have. One year later, our little island has slowed down. Some of the same houses that were for sale this time last year still have not moved. We also see more "For Sale" signs, par for the course given the housing slump, yet prices don't seemed to have fallen all that much. Go figure.

Meanwhile, all is not well in St Joes land, at least that's what Mr. Market is telling us. The stock is down nearly 20 percent since last summer, and after hitting more than $60 in February, is off 33%. Certainly trouble in the housing market, and a slowing Florida real estate market are the main contributors, but a skeptical Wall Street has also added to St. Joe's woes.

At a May Ira Sohn Investment Research Conference, Greenlight Capital co-founder David Einhorn painted a bleak picture of JOE, suggesting, among other things, that half of the company's land is swampland, and that on a DCF basis, the company is worth but $15 per share. Since this conference, the stock has tanked. Although Einhorn raised a few eyebrows with his talk--even Jim Cramer mentioned the ST. Joe swampland connection--the pullback has more to do with the asset repricing that many real-estate related firms are currently experiencing in the wake of the housing slowdown, and subprime "event".

While we disagree with Einhorn's assertion about the quality of St Joe's land, lets assume that half of it is actually swampland. Further, for calculation purposes, we'll assume that it is completely worthless.

As of the most recent quarter, St. Joes held 739,000 acres, 331,000 of which were within 10 miles of the Gulf of Mexico. If half of these acres were worthless (which again, we don't believe is the case), and we value the entire company on an enterprise value to acre basis, we get $9,242 per acre:

Market Cap: $3.0 billion
Plus Debt: $428.5 million
Plus minority interest: $7.4 million
Minus Cash: $20.2 million

Enterprise Value: $3.415 billion
Half acreage: 369,500
EV/Acre: $9,242

Florida land for less than $10,000 per acre, given the location, does not seem at all unreasonable. Keep in mind, our EV/acre calculation does consider the company's debt, but places no value on any of the company's other assets, and values half the land at $0.

Einhorn simply views Joe on a much different basis than we do. Discounted Cash Flow analysis can be an extremely valuable tool in order to value a business, and indeed, theoretically, the value of a business is the present value of future cash flows. But any analysis that discounts cashflows is completely dependent on the inputs used in the calculation. A slight change in the inputs can have a drastic influence on the resulting value.

But, in any event, we view JOE as an asset play, one that might ultimately be acquired. We'd view additional weakness in JOE as a buying opportunity.

*The author has a position in St Joes Corp. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. The author will not trade any of the securities mentioned (buy, sell, short) for at least two weeks following the date of this post.

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