The St. Joe Company: Einhorn vs. Berkowitz

Published on October 13, 2010 at 3:13 pm

According to an article on Barron.com, David Einhorn presented a very bearish case against The St. Joe Company this morning at the Value Investing Congress.  Mr. Einhorn is President of Greenlight Capital and one of the most prominent “super investors” in the value investing community.  He is most well known for his early warnings forecasting the demise of Lehman Brothers.  In the case of St. Joe, Mr. Einhorn is taking a position directly opposite to many other prominent value investors, most notably Bruce Berkowitz who controls 29 percent of St. Joe shares through The Fairholme Fund.

Beautiful Land or Dreary Acreage?

St. Joe is the largest private landowner in Florida and owns 577,000 acres of land in Northwest Florida according to the company’s latest 10-K report.  According to Mr. Berkowitz, St. Joe’s land is very attractive but has been left undeveloped for years due to a lack of good transportation options for those who may want to own second homes in the region.  The recent opening of a new international airport built on land donated by St. Joe is supposed to serve as a catalyst for tourism and vacation housing.  While the land holdings are within close proximity of the Gulf Coast, it appears that the company escaped major direct impact from the Deepwater Horizon oil spill, although St. Joe has filed lawsuits alleging related economic damages including a claim against Transocean filed on October 12.

Mr. Einhorn cast doubt on the quality of St. Joe’s land and displayed several slides showing “dreary” looking acreage around the airport.  He also went into some detail regarding individual developments that have not been built out according to previous plans and even claimed that one development is “next-door to a sewage facility”.  The bearish thesis seems to rest on the assumption that St. Joe has overstated the value of its remaining land holdings.  With the best acreage sold during the real estate boom, Mr. Einhorn claims that only $7 to $10 per share of value remains.  St. Joe shares are currently down nearly 10 percent for the day at $22.16 due to reaction to Mr. Einhorn’s presentation.

Einhorn vs. Berkowitz

Mr. Einhorn was asked about Mr. Berkowitz’s ownership of St. Joe and said that he reached out to debate the stock with him but is still waiting for a response.  The video below from May 2009 features Mr. Berkowitz presenting the bullish case for St. Joe.  According to more recent comments (as well as his continued ownership), it appears that his views remain basically unchanged:

For RSS Feed Subscribers, please click on this link for the video.

Lesson for Investors:  Do Your Own Work…

Many investors closely monitor the holdings of well regarded managers when searching for investment candidates.  This practice makes a great deal of sense as part of an idea sourcing strategy, but it is never a good idea to simply follow a well regarded investor into a stock.  As we can see from the case of St. Joe, well regarded value investors will excellent track records can look at the same set of facts and come to completely opposite conclusions.  We don’t know who is correct about St. Joe, but it is clear that both Mr. Berkowitz and Mr. Einhorn cannot be correct regarding the company’s prospects.

We have no position regarding whether the bullish or bearish thesis for St. Joe makes more sense based on reading the company’s financial data.  One of the reasons is that St. Joe may be one situation where the company cannot be evaluated properly without actually looking at the land in question directly.  Investors purchasing St. Joe shares are actually buying acreage, and clearly the beauty (or lack thereof) of this land is in the eye of the beholder.  The current controversy makes it even more interesting to consider inspecting the land directly.

Update – October 13, 2010 7:30 pm: David Einhorn’s presentation is now available online:

Click here to view the presentation.

Disclosure:  No position in The St. Joe Company.

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Posted on Oct 13 2010. Filed under Featured Articles, Investing. You can follow any responses to this entry through the RSS 2.0. Both comments and pings are currently closed.

6 Comments for “The St. Joe Company: Einhorn vs. Berkowitz”

  1. Great post contrasting both sides. I have a feeling we’ll see a compare & contrast in-depth breakdown at some point if some investor isn’t already working on one already.

    Very prudent also to highlight the need for investors to do their own due diligence. Following blindly can potentially be a lemming-like disaster. Berkowitz himself said he always pays attention to what other investors are doing for idea sourcing. But after that, it’s on him to do the work and find holes in any thesis.

    While I doubt we’ll see a back and forth like we did with Pershing and Hovde re: GGP, it would be a great investing case study and debate pitting two of the more successful managers against each other in terms of their rationale. Again, good piece and will be linking to it in my weekly linkfest.

    Jay
    @marketfolly

  2. After reading the presentation, I come away with the following observations:

    (1) Einhorn is almost certainly correct regarding impairment of St. Joe’s properties based on today’s depressed real estate environment in Florida. It is hard to refute calculations based on recent sales. Facts are stubborn things. St. Joe management needs to immediately respond to Einhorn’s comments regarding exactly what was capitalized into the projects and how the current carrying values can be justified based on recent sales activity and prevailing prices.

    (2) Einhorn’s bearish thesis seems to depend on a relatively long real estate slump in Northwest Florida during which time St. Joe fails to bring in any meaningful revenue (due to uneconomic prospects for lot development) while burning through $50 million in overhead per year funded by rural land sales. It seems to me that at least part of the bearish thesis could be countered by dramatically reducing overhead – by “going dormant” until conditions improve. Berkowitz and other major shareholders could demand a reduction in overhead to a barebones staff until conditions improve, thus dramatically curtailing cash burn.

    (3) If and when real estate conditions improve in the area, it seems like it will be driven by vacation home purchasers rather than local residents given the low median incomes of the region. Second home buyers would benefit from the new airport, but will it be a deciding factor? Most people who are willing and able to fly on a regular basis to a second home are affluent and looking for property in desirable locations – probably oceanfront or near oceanfront. Will the interior lots ever have value in a “non bubble” environment UNLESS local residents buy up the property for primary homes? And if so, will the airport bring about a boom that creates jobs and boosts median incomes to at least the national average? This seems doubtful.

    One thing seems abundantly clear: St. Joe needs to either write down the carrying values of the impaired properties or present a compelling case for why those values are supported by current market conditions. Saying that the market is “temporarily depressed” and the land will have higher value later is fine but carrying value should be accurate.

  3. And the plot thickens further … Berkowitz was a BUYER of St. Joe yesterday in the wake of Einhorn’s presentation … 135,600 shares:

    http://www.sec.gov/Archives/edgar/data/745308/000091957410005860/d1138270_13-d.htm

    I guess Berkowitz wasn’t convinced …

  4. Hey, I can’t view your site properly within Opera, I actually hope you look into fixing this.

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