mikulas1/E+ via Getty Images When it comes to the real estate market, it’s all about location. Where a company operates can have a significant impact on its growth potential and army cash flows it generates. One company in this space that investors have been very enthusiastic about in recent months has been The St. Joe Company ( JOE ). Recent growth for the business has been rather rapid following years of steady expansion. And with a plan put in place by the company to reach even new highs, investors believe that upside for them could be significant. Though this is a possibility, there’s also no denying that there is a downside to buying into such a popular business. Shares today, for instance, are priced at levels that might be difficult to justify. At best, the firm might be fairly valued. But if financial performance of the firm was to eventually revert back to levels experienced previously, shares would likely see meaningful downside from here. So at the end of the day, the risk to reward ratio for this particular prospect likely does not make sense for more prudent investors. Instead, this is the realm of speculators who don’t mind making something of a gamble out of their investment funds. Recent performance has been great
Back in July of 2021, I wrote my most recent article about St. Joe. At that time, I acknowledged that the company was growing faster than I had expected it would. Revenue expansion was impressive as management raced to sell additional homesites and to engage in its other business activities such as asset management and the operation of properties it owns. But at the end of the day, I made the case that while the company is likely an attractive prospect with near-term growth potential, shares were trading at levels that were difficult to justify. And as a result of that, I rated the company a neutral prospect. Since then, the market has soundly disagreed with me. Investors buying into the firm would have generated a profit of 31.5%. That stacks up against the 2.1% return achieved by the S&P 500 over the same window of time.
This increase in share price has not been without cause. You see, when I last wrote about the company, the most recent quarter for which data was available was the first quarter of the company’s 2021 fiscal year. Today, we now know financial performance for the entirety of that year . And performance was quite robust. After seeing revenue increase at an annualized rate of 13.5% between 2016 and 2020, the growth in 2021 was a robust 66.3%. That took sales up to $267 million compared to the $160.6 million the company reported for 2020. Although there are many working parts to the business that contributed to this expansion, the largest appears to have been related to the sale of homesites, mostly involving the 170,000 acres of land the business has in Northwest Florida. As a note, this is not much changed from the 177,000 acres the company owned back in 2017. Author – SEC EDGAR Data According to management, the number of homesites sold totaled 804 during the year. This was in addition to the sale of two homes. By comparison, in the 2020 fiscal year, the company sold 509 homesites and zero homes. Not only did the number of homesites sold increase, the price at which the sales took place rose as well. According to the data available, the average price per homesite was $157,000. This compares to the $124,000 reported for the company’s 2020 fiscal year. This is one area that I like to point to when I think about whether or not the company is sustainable at current pricing. Management made clear over a year ago their plans to get up to the point of selling 1,000 homesites per year on a regular basis. That is likely achievable. But the pricing at which these take place can be variable based on market demand. In 2016, average pricing was $114,000. This dropped to $95,000 in 2017 before plummeting to $78,000 in 2018. 2019 saw average pricing of $87,000 before we saw the increase to the $124,000 figure in 2020. The real estate market, particularly in the Sunbelt region of the US, is really on fire right now. But there’s no telling how long that will remain the case. A plunge in pricing could negatively affect the business in a big way. Author – SEC EDGAR Data […]
Protected by Patchstack