Tuesday, November 2, 2010

Closing the Book on JOE

I listened to the third quarter earnings conference call by the St. Joe Company, and I have to close the book on this story, but here's what I noted. After the usual formalities, and before the
Q&A, the CEO gave a verbal overview of the company's historical evolution and business strategy; he seemed to be doing an elevator pitch to answer the question, "What is St. Joe?" It is something that needs to be done on a grander scale and on a more thorough basis in their public disclosures. I'm sure that their shareholders encouraged something like this. It was a good start, but less than effectively realized.

Next, the CFO gave a very dryly formulated description of their impairment review process for long-lived assets, concluding with the statement that the process showed their long-lived assets to be appropriately valued at the end of the third quarter. The external auditors were cited as reviewing the analysis and process, although it was not clear what period the review covered. Later in the call, the CFO noted that the company had taken $196 million in impairments over the past three years, meaning that it was not averse to taking write downs where warranted. Again, it's good to deal with the issue directly, but it could have been done in the context of a positive statement about shareholder value.

The company did address at least two points that were covered in the Greenlight Capital presentation by David Einhorn. The first was the suggestion by Greenlight that Southwest Airline's investment in gates at Panama City International Airport was in tatters. St. Joe, which is on the hook to make up any Southwest losses for three years, noted that the Southwest Airlines investment in the gates was "profitable from day one," and that the third summer quarter exceeded the airline's expectations, generating the best profit since the signing of the agreement. There's no doubt that the talcum powder, white sands of the Florida Panhandle could make an attractive tourist destination, but the key questions are "For how many people with what kinds of budgets?" and "When?"

The second point addressed the suggestion by Mr. Einhorn that St. Joe had given away access to the airport site to the airport authority and now needed to get "through the fence access" in order to share in future development rights. On the face of it, this seemed like a giveaway. In fact, this isn't true, according to the company. Through the fence access rights were reserved to St. Joe and enshrined in the original agreement with the airport authority, and rights conferred on the authority were limited to the development of aviation infrastructure, such as runways and supporting structures.

The analyst questions from Raymond James, Keefe Bruyette Woods, JMP Securities, and Morningstar were alternately fawning, vague, and unlikely to produce research that would generate additional institutional ownership. Towards the end of the call, one analyst dwelt tediously on the specific lease terms for a single CVS drugstore, as if this by itself made any difference to the valuation of the company or its prospects. My advice to the company would be to work hard on telling your own story better, with clear financial metrics.

There was a question about cash burn rates relative to $196 million in cash and when the company would get to profitability. Unfortunately, the CFO didn't really complete the answer to the question. If I understood, his comment was that cash S,G&A expense, excluding one-time items, declined 21% year-over-year, so the management had their eyes on the till. He didn't venture a forecast on profitability.

We're going to close the book on this JOE story, but I wouldn't expect to see the company gaining additional shareholders until the runway to shareholder value creation becomes visible.

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