St. Joe Company: Some Short-Term Cracks In The Armor Showing (NYSE:JOE)

The share price of St. Joe Company (NYSE:JOE) has made a big move since hitting its 52-week low of $31.11 on September 26, 2022, before consistently climbing to trade at approximately $43.00 per share, as I write.

But per its last earnings report, there were signs the company is facing some significant short-term headwinds that are overdue to put some downward pressure on the stock.

Among them are delays in homesite and home deliveries as a consequence of supply chain disruptions that have increased construction costs, which among other things has contributed to an 18 percent decline in net income in the third quarter.

So even with a strong backlog of homes and homesites under contract, their contribution to the top and bottom line is going to take time to play out, which should put further pressure on the performance of JOE, even with the diversified revenue streams it has built.

In this article, we’ll look at some of its latest earnings numbers, and the headwinds it faces that I think will result in a significant correction in its share price.

Some of the latest numbers

Revenue in the third quarter of 2022 was $57.6 million, compared to revenue of $54 million in the third quarter of 2021. Revenue in the first nine months of 2022 was $190.7 million, compared to revenue of $168.00 million in the first nine months of 2021.

Real estate revenue, which has generated the most revenue for the year, dropped from $23.5 million in the third quarter of 2021 to $17.3 million in the third quarter of 2022. Real estate revenue in the first nine months of 2022 was $52.1 million, compared to revenue of $85.6 million in the first nine months of 2021.

I believe the downward trend in real estate is going to continue in the near term, and that could be the negative catalyst that triggers the correction in its share price that I believe is coming.

Hospitality revenue in the third quarter was $29.00 million, compared to $22.3 million in the third quarter of 2021. Hospitality revenue in the first nine months of 2022 was $74.9 million, compared to hospitality revenue of $58.00 million in the first nine months of 2021.

Leasing revenue in the third quarter was $10.00 million, compared to $7.1 million in the third quarter of 2021. Leasing revenue in the first nine months of 2022 was $28.2 million, compared to leasing revenue of $19.1 million in the first nine months of 2021.

Timber revenue in the third quarter of 2022 was $1.2 million, compared to timber revenue of $1.1 million in the third quarter of 2021. Timber revenue in the first nine months of 2022 was $5.4 million, compared to timber revenue of $4.8 million in the first nine months of 2021.

Net income in the third quarter was $12.34 million, or $0.21 per diluted share, compared to $15.2 million, or $0.26 per diluted share. Net income in the first nine months of 2022 was $42.8 million, or $0.73 per diluted share, compared to net income of $42.6 million, or $0.72 per share in the first nine months of 2021.

This is one of the areas I’m watching closely because if there is further erosion in the real estate market, and it being the largest contributor to the performance of the company, these numbers would get worse before they got better.

At the end of the third quarter, the company held cash and cash equivalents of $18.8 million, compared to cash and cash equivalents of $70.2 million at the end of calendar 2021. It had net debt of $321.00 million at the end of the third quarter, compared to net debt of $223.00 million at the end of calendar 2021.

Rising debt liabilities combined with rising interest rates and real estate costs are another of the headwinds the company faces in the near term.

Real estate segment

With its real estate segment, the largest in the company, I’m going to primarily focus on that because it will have the most impact on the company for the short and long term.

Considering homesite sales, volume fell 34 percent to 78 homesites sold in the reporting period, compared to 119 homesites sold in the third quarter of 2021. Not only were the volume of homesites down big, but the average price per homesite plummeted as well, falling from $159,000 per homesite in the third quarter of 2021 to $141,000 per homesite in the third quarter of 2022.

The decline in volume closed was primarily from the lack of completed homesites available to buyers in residential communities.

For the first nine months of 2022, sales of homesites came in at 490, compared to 494 homesites sold in the first nine months of 2021. The average price of homesites in the first nine months of 2022 was $117,000, compared to $125,000 average price per homesite in the first nine months of 2021. The drop in average homesite price in the nine-month period was attributed to an unfavorable mix.

At the end of the third quarter of 2022, the company had 2,376 residential homesites under contract, compared to 1,661 residential homesites under contract at the end of the third quarter of 2021. The value of the 2022 contracts was estimated to be $186.3 million, and at the end of the third quarter the 2021, contracts were valued at $160.7 million. Although management noted that there were supply chain disruptions that ended up delaying homesite and home deliveries by several months resulting in an increase in construction costs, it was added that the delay in deliveries were at the time, a change in timing and not a cancellation of contracts. At the time of the earnings report, the company said as soon as they complete homesite development, they are acquired by homebuilders.

My response to that in a rising interest rate and mortgage environment, combined with an increasingly uncertain labor market, this is subject to rapid changes, and I think those changes, if not already here, are near at hand as the Federal Reserve prepares for its next interest rate raise, even if it’s lower than the prior one.

In the long term, I think JOE should do okay, but in the near term, I think negative real estate trends are going to continue to get worse, and that’s certain to have an impact on the top and bottom lines of the company, being that it’s the largest segment in the company.

Conclusion

The share price of JOE has been on a big run recently, jumping of its double bottom of approximately $31.00 per share in October 2022, and soaring to almost $43.00 per share since then.

But with that unabated rise in share price with the weight of its real estate segment remaining in place, I think it’s only a matter of time before the share price corrects. I think investors may be bidding up the price leading to its next earnings report, which before then they’re likely to unload to lock in some solid profits.

With the ongoing delay in real estate homesites, the impact in the near term could be substantial, specifically after the next interest rate hike or two, which if combined with an underperformance in its real estate segment, could test its 52-week low. Anyone buying at the price it’s trading at now is potentially setting themselves for a prolonged period of time of being underwater, especially if the economy goes further south and demand erodes more.

Again, real estate is easily the biggest segment JOE competes in, and it’ll have more impact on the stock than its other units. For that reason, I would wait for a pullback before considering taking a position in JOE because the higher it goes, the riskier it gets, and risk/reward is no longer in an investor’s favor.