We have recently upgraded the long-term recommendation for The St. Joe Company ( JOE - Analyst Report ) , a publicly held real estate company, from ‘Neutral’ to ‘Outperform’ primarily due to its strong future growth prospects.

Based in Jacksonville, Florida, St. Joe is one of the largest real estate developers of Northwest Florida. Over the years, the company has developed successful residential and commercial projects and related infrastructure, which in turn has attracted regional and national businesses to the area that contributed to the regional growth and prosperity.

The Northwest Florida Beaches International Airport developed by St. Joe is the first new international airport opened in the U.S. since the 2001 terrorist attack, and is expected to become a major growth driver for the region. The airport greatly increases the future value of its holdings, and provides an upside potential for St. Joe. The company has also launched Venture Crossings Enterprise Centre at WestBay – a commercial development spanning 1,000 acres adjacent to the new airport, for industries, offices, retailers and hotels, which will likely have a positive economic impact on the region in the long run.

Over the last few quarters, St. Joe has significantly reduced its debt through stringent cost-cutting measures and reduction in operating expenses. The elimination of debt greatly reduces the risk to shareholders and strengthens the balance sheet with a more efficient and less capital-intensive business model, giving the company the flexibility to weather any possible downturn in residential real estate.

Furthermore, St. Joe is the majority landowner in Northwest Florida, and most of the real estate developers in the region are forced to acquire land from it at high market price and subsequently build amenities in order to provide any meaningful competition to it. These offer a significant long-term competitive advantage to St. Joe.

However, St. Joe has historically generated considerable revenue from rural land sales. With a tough macroeconomic environment, potential buyers have struggled to obtain finances for commercial projects, and selling land at attractive prices has become increasingly difficult. Consequently, revenue from rural land sales has virtually dried up, and is likely to affect its long-term profitability.

We presently have a Zacks #1 Rank for St. Joe, which translates into a short-term ‘Strong Buy’ rating. However, we have a ‘Neutral’ recommendation and a Zacks #1 Rank for Rayonier Inc. ( RYN - Snapshot Report ) , one of the competitors of St. Joe.