Rule #1 Finance Blog

With Investor Phil Town

YOUR HOMEWORK: EVALUATING A COMPANY IN TRANSITION

Here’s another piece of homework, submitted by Garrett Smyth of Chattanooga, TN, who was a professional golfer for 15 years before making a career change to sales.

Garrett wanted to know if the YUMMMMY analysis works in determining the value of transitioning companies that are moving into new and different sectors. Below is his question and my response. I’ll post more about his progress once he calculates the Moat for the company in question.


On 6/9/05, Garrett Smyth wrote:

Phil,

Question:  What is your feeling about a company that has changed directions from what they used to be to something new?  My example is St. Joe Company in Florida.

St. Joe Company was originally a paper company in Northwest Florida who in 1997 shifted its emphasis away from paper products into real estate development.

Ironically my mother, who has been traveling to Port St. Joe, FL to vacation with some family friends, would always ride through their land on the way to get there.  She’s the one who noticed the property and started to realize that St. Joe Company had become a real estate development company. 

I did some research on St. Joe and found out that Peter Rummell the CEO was part of the development of Hilton Head Island’s Sea Pines development where they play the PGA Tour Heritage Championship, Amelia Island, and Disney’s non theme park developments around the world.  All in my opinion kick ass places.  Especially Sea Pines.  I used to live on Hilton Head for two years.  He has extremely interesting concepts for the use of the land.  Some tracts for back to nature "farms" and some tracts to build smaller multi-"home town" feel communities.

Now my question:  When I use your formula to value a company, it appears to be overvalued.  I am starting to learn the YUMMMMY approach so please bear with me, (is bear a bad term when talking stocks) but is it possible in a world where anything’s possible, is it possible that when valuing a company that is in a transition (paper products to real estate) the potential business isn’t accurately recognized similar to a start up company so therefore the potential value of a stock might not be accurately reflected in the YUMMMMY approach?  If so, what is a more accurate way to value the company?  A comparison to similar companies based on the amount of land they have owned and developed?

Ok maybe that was more than one question but it all ties together.  When you get a spare moment you can mull it over and get back to me?

By the way, I was very serious about the golf offer last time.  When you want to learn to play, just let me know.

Thanks.

Garrett W Smyth

From: Phil Town
To: Garrett Smyth

Hi Garrett,

This is good stuff you did on St. Joe.  And a good question about YUMMMMY.  The first two letters force me to understand what I’m buying.  I want to buy it as if this business is the only source of money for my family for the next 100 years.  That means I need to be able to make a pretty solid prediction about the future of this business before I even consider the Sticker Price.

So here’s the question:  Even if the guy who is running St. Joe did great elsewhere (which is huge and wonderful, by the way) how will we be able to predict how he’ll do here?  In other words, what does St. Joe have that gives it predictability besides a great CEO?  What is the Moat?

That question is where the rubber meets the road for a Rule #1 investor.  Get the answer right and you’ll either look elsewhere or know (the key word is ‘know’) your money is going into a great company at a wonderful price.  Get it wrong and anything can happen and usually does!

So, Garrett.  What’s the moat?

Phil