What would you say if someone offered to sell you some swampland in Florida? Well, Jacksonville-based St. Joe ( JOE) 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) reported strong first-quarter results but said new orders fell 12% vs. a year ago, echoing prior declines reported by Toll Brothers ( TOL).

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.

In early March, St. Joe announced FloridaWild, a land sale program. It's entirely possible that St. Joe has opted to sell its land rather than develop it because of the softening market. While that makes sense from a risk standpoint, it doesn't speak well of the company's prospects going forward.

In addition, St. Joe acknowledges that its real estate, while pretty to look at, isn't necessarily the most hospitable of environments. At least not for humans.

"We honestly asked ourselves, 'Will people live in this environment?' We've got critters, we've got heat, we've got humidity," Kevin Fox, an executive who is overseeing the RiverCamps community on Crooked Creek in Bay County, Fla., told The New York Times in August.

You probably won't see that tag line in the brochure.

Some of those critters (and the people who love them) may cause some problems for St. Joe. The Nature Conservancy has ranked the area as one of the six most biologically diverse regions in the U.S., and it is home to 27 federally endangered species. The National Resource Defense Council is fighting several initiatives that are both directly and indirectly tied to St. Joe. In a non-binding referdendum, locals voted down a proposal for the new airport in Panama City, which -- if ultimately approved -- would benefit St. Joe by providing easier access to the area. (A final ruling is expected this summer.)

Opponents are also trying to protect their towns from congestion, declining water quality and costly cleanups, such as what occurred in South Florida. The Everglades cleanup has already cost $8 billion and counting. "We don't want to be like Orlando and South Florida," says Linda Young, director of the Clean Water Network of Florida. "But St. Joe is trying to cram it down our throats."

A representative from St. Joe was not available for comment.

Currently very powerful in Bay County as well as in the state legislature, St. Joe could lose some of its political influence in the upcoming 2006 elections: Two supporters, Governor Jeb Bush and Speaker of the House Allan Bense, are leaving office.

El Presidente

After his beach house was damaged by the 2004 hurricanes, Kevin Twomey, president and COO of St. Joe, told The Orlando Sentinel that the storms did affect sales, but the damage to his own home prompted him to "move to a bigger beach house." That's all well and good if you're a $1.6-million-per-year executive who has sold nearly $25 million worth of stock in the past two years. But for the average coastal resident (even the well to do), the cost and hassle of cleaning up after another hurricane could be a significant deterrent.

Incidentally, Twomey isn't the only one making a bundle at the company. Chairman and CEO Peter Rummell took home a $2.5 million salary and sold $49 million worth of stock over the past two years.

With $25 million in the bank, Twomey will walk away from his job in May in order to spend more time with his family. A successor has not been named yet, but it is widely expected to come from within the company.

Twomey is a widely respected executive who led St. Joe's initial effort to sell some of its vast tracts of land. Twomey and CEO Rummell have been the trusted names and faces of St. Joe as far as Wall Street is concerned. The former's retirement creates an uncertainty in a market that loathes uncertainty.

"Investors should consider this change carefully as many of the other management members are not well known to the Street," wrote Morgan Stanley analyst Gregory Whyte, adding he is "sorry to see Twomey leave the company, especially given the recent shifts in homebuilding fundamentals." Morgan Stanley has an investment-banking relationship with St. Joe and owns more than 1% of the stock.

North Bound Mule

The First Call consensus for 2006 is EPS of $1.84, a mere 5.7% increase from last year's $1.74. Sales are expected to improve by 13.5% to $1.07 billion, in part due to FloridaWild. Estimates for 2007 increase dramatically to earnings of $2.22 per share on sales of $1.26 billion. However, that assumes the housing market in Florida returns to a healthy posture.

During the housing boom, St. Joe had a good track record of upside surprises, beating the Street in six consecutive quarters beginning in the first quarter of 2004. But as the tide turned, St. Joe missed in each of the final two quarters of 2005. The company's first-quarter results will likely be released in early May.

Because of its past upside surprises, the stock is currently trading at a 30% premium to the S&P 500; since 1997, St. Joe has traded at an average premium of 10%. Considering the tough environment for real estate in Florida, a return to its historical premium is reasonable, and that gives a price target of $46.25.

Additionally, the technicals look awful.

Shaky Foundation
St. Joe's chart looks almost as treacherous as the swampland it's trying to sell.
Source: StockCharts.com

As one of my favorite technical analysts, Gary Kaltbaum, says, the stock looks like the south end of a north bound mule. St. Joe has been in a downtrend since last summer, making lower highs and lower lows. Volume has been strong on the declines and lighter when the stock rises. If the stock breaks $58 (which I believe it will), there isn't support until $48, just above where St. Joe would trade on the basis of its historical valuations.

I am emboldened when the technicals and fundamentals line up; therefore, a price target of $48 makes a lot of sense.

And for those of you who remain bullish on St. Joe, I have some swampland in Florida I'd like to sell you.
In keeping with TSC's editorial policy, Lichtenfeld doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.

Marc Lichtenfeld was previously an analyst at Avalon Research Group and The Weiss Group and a trader at Carlin Equities. He holds NASD 86, 87, 7 and 63 licenses. His prior journalism experience includes being a reporter/anchor for On24 in San Francisco and a managing editor of InvestorsObserver, a personal finance Web site. He is a graduate of the State University of New York at Albany. He appreciates your feedback; click here to send him an email.