Finding value in growth, take your laptop to the beach for a one-decision stock, the St Joe Company $JOE

Part of the Gold, Oil, Land inflation protection strategy.

Founded in 1936 with money from the DuPont family trust by Alfred DuPont’s brother-in-law and trust executor, the St. Joe  Paper company once owned over 1,000,000 acres of timber land in Florida, give or take about 2% of Florida.  After some land sales to pivot strategy away from timberland and toward coastal development, that number is now down to 171,000 acres with 53,000 placed into conservation, so about 118,000 developable acres with about half of that a part of a 50 year master plan called the Bay-Walton Sector Plan which approved the construction of 170,000 residences, 22 million square feet of commercial space and 3,000 hotel rooms.

In a world obsessed with “pure plays” this is pure Florida real estate development.  Florida is the fastest growing state in the nation, with about 1,200 people net migrating every day, and GDP grew 5.7% last year.  One of the counties that the St Joe Company (JOE) landholdings straddles had 10% population growth in 2022.  The Cato Institute ranked Florida as #2 in the nation in overall personal freedom and #3 in the nation for educational freedom.  The winter is lovely, but the summer can be a bit oppressive, and work from home is a thing now.  

While the first major wave of migration into Florida came from New England, New York, and New Jersey down I-95 and populated the east coast of the state, there is a new wave of migration from the interior of the country driving down I-75, and they are settling the west coast and the panhandle of Florida.  Don’t like the taxes, stagnant economy, and government overreach in Michigan, Illinois, Indiana, or Ohio, then come on down to the Florida panhandle.  

So if you believe that we will experience sustained inflation and land will outperform, and if you believe work from home will flourish and thrive, and if you believe internal migration to the sunbelt has decades to continue, then just buy JOE and bring your laptop to the beach and stop having so much stress in your life.  You can even bring your laptop to the Panama City Beach at a JOE resort property.

That’s exactly what fund manager Bruce Berkowitz did when he transitioned his hedge fund to be 80% concentrated in JOE with his position of 22 million shares, or about 37% of the float.  Recently departed Charlie Munger once said that some investments are so good that it’s a mistake to not put 50% of your net worth into it.  Bruce Berkowitz at 80% has even one-upped Charlie.  In order to protect his investment, Berkowitz has become chairman of the board, and when management falters, Bruce goes medieval and replaces them.  The current CEO, Jorge Gonzalez, was installed by Bruce Berkowitz after the last management team demonstrated the typical managerial bureaucrat misaligned incentive behavior that I have written about repeatedly in other articles.

““Don’t put all your eggs in one basket” is all wrong. I tell you “put all your eggs in one basket, and then watch that basket.”” - Andrew Carnegie

The strategy of Berkowitz with JOE is exactly what the Chinese tycoons in the Philippines did, and it is exactly what I would do in his place.  Develop the residential communities for sale, and with those profits, develop the commercial properties for rent, but never ever sell the commercial real estate.  Take a look at that landholding picture above, and imagine the future of St. Joe after having developed and sold their 170,000 residences and are now collecting ever increasing rent from every grocery store, every gas station, every strip mall, every office park, and every restaurant on their 118,000 acres for development, half of which is already permitted for 22 million square feet of commercial development.  And in the meantime, management is dribbling out a modest dividend and share buyback program so that we don’t have to wait a full fifty years to get paid.

Another thing about JOE that is an added bonus is their fixed rate debt with an average interest rate of 5.3% and an average duration of 17 years.  I am looking forward to inflation destroying the real cost of that debt over time, meanwhile investors get to enjoy the nominally increasing real developments created with the nominally fixed debt.  I only wish they had more than $620 million of it.  How many cheeseburgers will $620 million buy JOE’s lenders in 2041?  I bet fewer than most of us think.

So how do we value JOE?  The property was purchased so many years ago that on the balance sheet the book value of the land is $196 per acre. And that is for 171,000 acres of Florida real estate, most of it within miles of the beach.  Trading at Price to earnings of 38, and a price to sales of 7.68, the multiples look more like a tech startup than a real estate developer.  I would have never found JOE through any value screens, I only heard about it the same way many of you did, listening to Harris Kupperman “Kuppy” on podcasts. 

Valuing JOE requires putting a price on growth, which is not a skill that value degenerates use often enough. I will use 2016 as a starting point because that’s when the new management was fully in control after Berkowitz sacked the people responsible for prior bad actions.  

In the nine years of control by new management, leasing revenue compounded at 19.9%, residential construction revenue compounded at 25.9%, and resort revenue compounded at 11.4% annually.  The balance sheet has compounded at 19%, including joint venture projects total revenue has compounded at 34%, EBITDA has been compounding at 30%, net income has been compounding at 25%, and with the effects of the modest share buyback, earnings per share have compounded at 30%.  Operating expense has fallen from 24% of revenue to 6% of revenue due to economies of scale from so much growth.

Paying $53.38 a share for a company with $1.39 in earnings per share makes a value degen recoil in abject horror.  But what will earnings per share be in five years if it keeps compounding at 30%? $5.16.  In ten years that number will be $19.16.  Paying $53.38 a share for a company that will have 2034 earnings of $19.16 a share, or a 2034 PE ratio of 2.78, is an easier pill to swallow.  And most importantly regarding growing companies, how far is JOE away from the point where their growth slows down?  I have lived in Florida since 1987, and I hardly recognize my old neighborhoods.  While most tech companies don’t have enough runway to justify those growth multiples, the Florida panhandle easily has 50 years of incredible growth ahead of it.

The biggest threat to JOE is if growth can’t meet that 30% rate, which is a reasonable fear, as a 30% compound growth rate is high, but when you break it down into a 4% inflation rate, 5% population growth rate for the Florida panhandle, 3% share buyback program, 1% dividend yield reinvested, and a 15% return on real estate development, it’s actually pretty in line with the data. But suppose JOE only achieved a 20% EPS growth rate, and because of that reduced growth rate, multiples contracted from a PE of 38 to 25. Well that would put 2034 EPS at $8.60 instead of $19.16. But at a PE of 25, that would be stock price of $215, or about a 4x from the current $53. So even if management, which has executed fantastically since Berkowitz gave prior management an alternative career path, started being mediocre, it would still be a 10 year 4x.

Another way to measure the same thing is to subtract growth from the PE.  I know a lot of people use the PEG ratio, but even though I write mostly about thesis here, I am a math nerd, and if you take the growing perpetuity formula as a converging series, growth should be subtracted from PE, not divided from it.  If you subtract the 30% growth rate in integers from a PE of 38, you get a growth adjusted PE of 8, which is pretty reasonable as a value investment.  In comparison, my last homebuilder post compared Beazer Homes with a PE of 5.28 but no past growth and Landsea Homes with a PE of 13.38 and a growth rate of give or take 10%.  

So which would you rather own, JOE, with several strong pure macro theses, perfectly aligned incentives, a capitalist at the helm, and a growth adjusted PE of 8?  BZH with bureaucrats at the helm, half of their production in California, no history of returning capital to shareholders, but a good probability of a transition to growth and a PE of 5?  Or LSEA with reckless growth, half of their production in California, capitalists at the helm, and a growth adjusted PE of 3?  JOE might be the least degenerate option here.  So however painful it is to buy something at a PE of 38 and a price to sales of 7.68, it really is a solid value stock.

If you still can’t bring yourself to see JOE as a value stock, the average acre of land in Florida sells for $35,000.  If comparable to JOE’s acreage the 118,000 developable acres not set aside for conservation would sell for around $4.13 billion, and the current market cap of JOE is only $3.1 billion.  But coastal real estate and intercoastal real estate is not average.  In landlocked Ocala with a population of 60,000, the average acre of land sells for $90,000, and at that price, JOE would be a $10.6 billion liquidation.  In rural lakefront Leesburg with a population of 65,000, the average acre of land sells for $125,000 which if comparable would value a JOE liquidation at $14.75 billion.  JOE’s landholdings are near the beach and the intercoastal West Bay and Grand Lagoon. Panama City might only have a population of 35,000, but Florida is growing at a rate of 1,200 people a day.