St. Joe Reverted to Neutral

We have recently lowered the long-term recommendation for The St. Joe Company (JOE - Analyst Report), a publicly held real estate company, from ‘Outperform’ to ‘Neutral’ as we anticipate it to perform in line with the broader market.

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 West Bay – 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.

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.

With large exposure to residential real estate business, St. Joe has no near-term growth catalyst and has reported losses in three of the four quarters of 2010. The company is also expected to repeat this dubious feat in 2011 as well. In addition, St. Joe’s business is primarily concentrated in Florida – one of the hardest hit states in the recession. We would avoid investing in the stock for the short-term.

We presently have a Zacks #3 Rank for St. Joe, which translates into a short-term ‘Hold’ rating. However, we have an ‘Outperform’ recommendation and a Zacks #1 Rank for Rayonier Inc. (RYN - Snapshot Report), one of the competitors of St. Joe.

Read the full analyst report on RYN

Read the full analyst report on JOE