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Markets

St. Joe: Beached

The Florida real estate developer stumbles because of a slowing market for vacation and retirement homes

St. Joe, a favorite of growth-fund managers and real estate investors, is more important than most midsize companies. It's one of the few property stocks that isn't set up as a high-payout real estate investment trust. So it's an obvious choice if you want to work some real estate into a growth portfolio. And as a major Florida landowner and builder of stylish waterfront retirement homes, St. Joe embodies the theme of the big-spending baby-boomer living a lavish lifestyle.

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So Joe's long and steady decline, which culminated this week with a 9% drop, to $50, is a significant development. The stock (symbol JOE) is down 40% from its high of last summer, a harder fall than you could explain just by the easing of real estate values or rising mortgage rates. (Other real estate stocks, especially REITs, have hung in much better. And how much could you sell your house or condo for compared with what it might have fetched last August? Bet it's not a 40% markdown.) No, the question is whether Joe has been punished too harshly or whether the stock got overinflated because of irrational exuberance and is now selling at a more rational price.

Here's the deal. On Tuesday, St. Joe reported a terrible first quarter, with earnings of 5 cents a share, far below expectations. The company's reason: poor sales and 10% to 15% price cuts on its waterfront homes because investors and speculators stopped buying and people who actually want to live in the houses are a much tougher sell. St. Joe also made two questionable decisions over the past few months: Last fall, it sold its commercial real estate management operation -- a good business that provided some diversification for the company -- and it bought back lots of stock at prices in the mid and high $60s.

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Chief executive Peter Rummell says Joe's growth will resume as it develops new and mostly lower-priced communities. He expects sales to pick up again in the second half of the year. But at the same time, Rummell says full-year 2006 earnings per share will be in the range of $1.40 to $1.85, a reduction from the company's earlier estimates of $1.70 to $2.15 per share. That means you'd need to see a price-earnings ratio of more than 30 just to break even on the stock over the rest of 2006. With higher interest rates also an issue for real estate, not to mention high gasoline prices and Gulf Coast hurricane fears, it's hard to see how Joe could regain such a high multiple until sales figures and home prices recover.

Joe is an appealing stock because Florida real estate has such a terrific history. It owns a lot of land. You could in fact fit all of Rhode Island inside St. Joe's Florida holdings. St. Joe bought much of this land for pennies an acre, back in the days when it was mainly a timber company. (It still has a small timber-sales business, but it's not enough to affect the stock much.)

Most analysts, meanwhile, are still rethinking their positions. After all, St. Joe is a unique company, and it's hard to turn thumbs down on Florida. Perhaps the verdict on Joe will come when fund families that hold large amounts of the stock, such as Baron, Marsico and Third Avenue, issue their next reports and disclose whether they've dumped significant amounts of Joe shares. If they're sticking with Joe, you should too -- but don't expect much action for at least the next couple of quarters.

--Jeffrey R. Kosnett

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