Jason Stipp: I'm Jason Stipp for Morningstar. As the oil in the Gulf spreads, the effect on other companies starts to come into a sharper focus. One of those companies is St. Joe. This is a landowner and developer in Florida and it's a recent new position in Morningstar's StockInvestor portfolio. This stock is also held by some other notable investors, including Bruce Berkowitz of the Fairholme Fund.
Here with me to talk about what he sees in the value of St. Joe is Morningstar's Paul Larson. He is an equity strategist and the editor of Morningstar StockInvestor.
Thanks for joining me, Paul.
Paul Larson: Thanks for having me.
Stipp: So the first question for you, obviously, because the oil is spreading and it's starting to head toward Florida now, it seems like there could be a potential amount of risk for St. Joe. Can you explain where this company owns land and what could potentially be at risk for them?
Larson: St. Joe does indeed own a large number of parcels in the Florida Panhandle, close to 600,000 acres in St. Joe's portfolio, almost all of it in the Florida Panhandle. So the oil is indeed heading for St. Joe.
When you look at the stock, the stock is down nearly 40% from – right before the oil spill hit.
But the thing that attracts me to St. Joe is that unlike a lot of the other companies that are involved in the oil spill, like BP and Transocean, St. Joe should be on the beneficiary side of the oil escrow accounts that have been set up. You might say that whatever liability BP has for the spill is certainly going to be an asset eventually for St. Joe.
Stipp: Given the kind of land that it owns and the sort of businesses that it depends on, what do you think could be a worst case scenario for St. Joe? I mean, what kind of risk are we really looking at?
Larson: I think the worst case here is if BP is unsuccessful in capping this well. If the relief wells don't do their job or if we have some sort of catastrophic failure of the existing pipe, as it is now, we get greatly increased flow rates and all of St. Joe's beaches are tarred, and it takes a large number of years to clean that up; that is a very bad scenario and certainly something that is within the realm of possibilities.
Stipp: So, the market, obviously, has taken the stock down quite a bit, as you had mentioned. So, I think the market is expecting a pretty bad-case scenario. What are you seeing on the valuation front then and the potential upside? I mean, what is the market saying about the value of this land that St. Joe holds?
Larson: Right. One of the things that attracts me to St. Joe is that the balance sheet is very clean. They have more cash than debt. And companies that have a net cash position don't go bankrupt. The land is always going to have value, whether it's oiled or not oiled. And so, this is not a zero unless we get a meteor hitting the earth. So the distribution of potential outcomes is capped on the downside, in my view.
Meanwhile, the upside is potentially very large. If BP is successful in capping the oil, I think that St. Joe is going to escape with minimal damage and things will rebound fairly rapidly. And when you look at the valuation front, I mentioned that the company has more cash than debt, and the stock is implying a valuation of roughly $3,800 an acre, with the majority of these landownings being within 15 miles of the coast in Florida, I think that is an exceptionally cheap price for that particular asset.
Stipp: So, certainly it seems like there could be a strong potential for upside, especially if we see some progress here on the containment front. So, last question for you then, even given the upside, there still is a range of potential outcomes here. How did you think about that when you were taking the position size and figuring out how big of a stake you wanted to have in St. Joe?
Larson: Right. Well, I did take a relatively modest position, only about a 2% position in the Hare Portfolio. Two reasons for that: one being the relatively large range of potential outcomes, the very high uncertainty around the situation; and then also this is not the typical stock that I like to buy in the portfolios. I like to buy wide-moat stocks that compound in intrinsic value over long periods of time, and this is not a so-called compounding machine. This is strictly an undervalued asset play, I would say.
Stipp: Well, Paul, thanks so much for joining me in and for your insights on St. Joe.
Larson: Thanks for having me.
Stipp: For Morningstar, I am Jason Stipp. Thanks for watching.