The Real Story: Say It Ain't So, St. Joe

What would you say if someone offered to sell you some swampland in Florida? Well, Jacksonville-based St. Joe (JOE Quote) is trying to do just that. The company owns over 800,000 acres in Florida, roughly 2% of the state. Much of it is in the northwest part of the state known as the Panhandle (or Redneck Riviera).

Although the stock has come down hard over the past few months and bulls now think it's cheap, I believe another 20% decline will follow.

There are some serious issues that overshadow the bulls' argument that St. Joe's is poised to benefit from a new airport in Panama City and from demographic shifts that continue to favor Florida and the "new ruralism." These include difficulties in its Town and Resort division, sluggish overall earnings growth, the loss of a key and well-respected executive and the niggling fact that the stock is trading at a 10% premium to its historical averages, a 30% premium to the S&P 500 and double the valuation of its peers across a variety of metrics.

The Real Story

St. Joe is selling rural chic -- the opportunity for baby boomers to retire or vacation in homes (affectionately known as "Cracker Modern") that are literally in the sticks or on managed farms. The city slickers don't have to bail hay or plant crops, though; that will be handled by a management company. It's sort of like the gated community meets Old MacDonald.

While the idea sounds quaint, the old rule about real estate -- location, location, location -- is an even more important notion for St. Joe. Some consumers like the idea of small-town Florida living, with a house in the woods. But homeowners may not be as willing to take a gamble on an undeveloped area if they are less confident of being able to turn a profit, now that the housing boom has stalled.

[Among the latest housing stats, Thursday's existing home sales data were stronger than expected but the Mortgage Bankers Association weekly mortgage applications index, reported Wednesday, fell to 393.6 from 403.0 and has now been below the one-year average in 13 of the past 14 weeks. Also, KB Home (KBH Quote) reported strong first-quarter results but said new orders fell 12% vs. a year ago, echoing prior declines reported by Toll Brothers (TOL Quote).]

Once among the hottest in the country, the Florida market has cooled quite a bit as a glut of houses have come on the market. According to Raymond James analyst Rick Murray, single-family home sales dropped 19% in January, with 18 out of 20 metropolitan areas experiencing year-over-year declines. Additionally, prices have been flat since June. Bank of America's Karin Ford is concerned that the 42% rise in resale inventories since August will make price growth in St. Joe's units less likely this year.