YCG Investments
“If you buy above average businesses at below average prices, on average, we believe you should come out ahead.” — Brian Yacktman

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What began as a timber company, has now become the largest real estate development company in Florida. Incorporated in 1936, St. Joe (JOE) owns 577,000 acres of low cost basis land which is primarily located in Northwest Florida. Of that amount, 70% is within 15 miles of the coast of the Gulf of Mexico.

In order to extract value from their real estate holdings, they donated 4,000 acres of land to the Airport Authority to relocate the Panama City Airport and build the Northwest Florida Beaches International Airport. With 300,000 of their acres within 40 miles of the new commercial airport, they are hoping this will be a catalyst to spur economic growth and real estate development. In October 2009, they enticed Southwest Airlines to enter into a strategic alliance with them by agreeing to reimburse any potential losses on its service at the new airport for the first three years.

The stock has been crushed as a result of a crummy Florida real estate market, fall-out from the BP oil spill, and most recently, a highly detailed and persuasive bearish report put out by the well-respected investor David Einhorn. Like Einhorn, with all the excess supply and current economic state, we don’t see Florida real estate recovering anytime soon. So, if the airport acts as a catalyst to the area, we would consider that sugar on top, but we don’t want to count on it panning out anytime soon. When analyzing this company, we believe it needs to be viewed purely as an asset play, but with an ongoing expense ratio stemming from overhead. In this case, when doing a sum of the parts analysis, the assets are very difficult to peg at a certain value. But at some point, you can safely say “it’s got to be worth at least this much,” and we believe JOE is trading far below that amount, even when you account for development costs and taxes that will be incurred as they liquidate their low cost basis holdings. Surprising for a real estate company, JOE essentially owns all their real estate outright – with net cash of $100MM on the balance sheet, they have ample time to patiently wait for development opportunities to pan out.

Normally, we aren’t too interested in hard assets that aren’t generating cash flow (see our blog on Gold). However, in this situation, you’re able to buy already hammered Florida real estate (don’t get me wrong… that was deservedly so), at a significant discount via JOE stock – essentially an arbitrage opportunity. It’d be like somebody offering me gold at $675/oz when it’s trading for $1,350/oz in the open market – we may not know exactly the proper value to peg on gold, but when we can get it half off the going rate, why not? We recognize in the short-run, there is much reason to believe a negative sentiment will remain towards JOE’s stock price, but it’s moments like these that create opportunity for the long-term investor.

Disclaimer: The specific securities identified and discussed should not be considered a recommendation to purchase or sell any particular security. Rather, this commentary is presented solely for the purpose of illustrating YCG’s investment approach. These commentaries contain our views and opinions at the time such commentaries were written and are subject to change thereafter. The securities discussed do not represent an account’s entire portfolio and in the aggregate may represent only a small percentage of an account’s portfolio holdings. These commentaries may include “forward looking statements” which may or may not be accurate in the long-term. It should not be assumed that any of the securities transactions or holdings discussed were or will prove to be profitable. Past performance is no guarantee of future results.

Posted by: Brian Yacktman | October 22, 2010 | Permalink

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