Bruce Berkowitz, co-founder of Fairholme Capital Management LLC and chairman of St. Joe Co., discusses the outlook for the banking industry and investment strategy. Berkowitz speaks with Erik Schatzker from the 2011 Morningstar Investment Conference in Chicago on Bloomberg Television’s “Street Smart.”
“St. Joe, at its core, is an asset management company,’’ Berkowitz said. “Successful asset management companies are very profitable. There’s no reason St. Joe can’t be profitable.’’
Berkowitz and Fernandez talk excitedly about St. Joe’s prospects, citing the airport, the proximity to Eglin Air Force base, the 5.5 miles of beach along the Gulf of Mexico, two hotels and four golf courses. The company, valued at $2.5 billion, has a stock price that values its land at just $4,200 an acre. St. Joe has no debt, $125 million in cash and has an abundance of land bought in the 1930s and on its books at original costs of $2 to $3 an acre.
“When you think of how much land touches the Gulf, and an international airport right in the middle, and when you think of the infrastructure on the land, the bridges, highways, waterways, and the beauty of the area, it’s a very simple value equation,’’ Berkowitz said.
But lately, St. Joe’s financial results have been far from stellar. The company lost $35.9 million in 2010, after losing $130 million in 2009.
Its stock hasn’t gone unnoticed by short sellers, particularly hedge fund manager David Einhorn of Greenlight Capital. In a 137-page slide show he presented at the Value Investing Congress last October, he criticized St. Joe, citing, among other factors, that the new airport presents little opportunity, that many of St. Joe’s developments are ghost towns, and that the company is little more than a timber company. Einhorn declined to be interviewed. Berkowitz scoffs at Einhorn’s assessment.
Bruce Berkowitz on CNBC here is the video followed by the transcript:
bruce berkowitz is a manager of a fund that has had an uncharacteristically difficult year due in part to all of thefinancials in his portfolio. bruce, i’m told your voice is not doing so well. you apparently had some plane troubles there, too, but we’re glad you’re with us. why all the financials? why do you continue to hold so many financials, especially given what seem to be so many concerns as reflected in the performance of their stocks? well, to me, it’s very much deja vu all over again with the financials. this is exactly whatdy in the early 90s. it’s very reminiscent of the early 90s. and how can you not buycompanies selling tangible book value that are essential to thecountry? well, you may have to wait a while. and i just wonder, you know, when you own 6.5% of your portfolio is in bank of america, citi is almost 5%, goldman sachs 5%, are you willing to sit there and wait? i could have made the same argument a year ago. don’t forget aig. of course. how could i ever forget iag? which we’ll get to in a moment. i know. but that’s why my voice is bad. i’m suffering from premature accumulation. let’s faulk about bank of america. i want to get to aig in a minute.that one more than any other has suffered. there’s concerns about slowly portfolio, rising severities, subprime, for example, to which it still has exposure. what gives you the confidencethat this stock trading now back where it was two years ago isgoing to ultimately be higher? well, i think brian moynihan is doing a great job. he’s added the curve. he’s lowering late fees, he’s doing everything that’s right. but the problem is is that bankof america is being kicked around like a dog. they’re being blamed for events that have taken ten and 15 years to unfold and that has to stop. it’s time for everybody to get together, settle up and move on and that will happen. bruce, i am a little bitsurprised when you talk about moynahan because your success has been really based on looking at the numbers, buying as you’re looking for a quantitative standpoint buying value. you’ve got to believe that part of the issue with bank ofamerica, whether it’s right or wrong, part of the issue has got to be the idea that a lot of participants do not believe moynahan is the right person for that role, given what’s happened to the company in the public markets since he became ceo. so are you essentially endorsing, while a number of called for change in management, are you saying that you believe bank of america management should stay as is? i think he’s doing a good job. and making money. i know the trends are going inthe right direction. he inherited commercial credit. they’re burning through it. it’s going to take another year, year and a half. but commercial credit issues are hiding everything else that there is at bank of america. they are generating a tremendous amount of money, 45, $50 billion a year. they’re generating pretax. compare that, which is $4.5, $5 a share, they’re already priced for — they are priced for disaster already.yeah. i mean, one does wonder why this stock is back writ was two years ago. i think most people would be hard pressed to say things aren’t any better two years later. but that being said — right. bruce, when you talk about the trends going in the rightdirection, what are you talking about specifically? i’m talking about delinquentsies, charge-offs, bad loans. you know, the whole morning mess. most of it is based on what was done in 2007 and 2008. today, it’s less than 40% of 2007 loans remain.2008, less than 50% remain. they’re burning through. their half lives are over already. it’s just a matter of another year for everyone to fully see it. bruce wrn you pleased with the way the ipo was handled? were you pleased with the pricing the way the banks priced it? and more importantly, did you and fairhome participate and increase your position in aig as a result of that a result of that ipo? well, let me say this partnership overestimated the powers of government and underestimated the powers of wall street. i think whoever participated in that public offering did very well and they will do well. yes, we did participate. you raised your position in aig. yes, we did. why?well, aig at half a book value charted its great global franchise on america, made in lap two, made in lane three and there’s more, but one-third of aia, i don’t understand — i really don’t understand the price, but a lot of the times, i don’t. that teams to early get all bloodies up and hopefully eventually everyone figures out out. you had the asset group substantially given your incredible performance. not just last year, but in years3r50ir. what do us at this point to whose looking at aig who helps fuel hair homes gains in 2010, people who moved into your mutual fund in the last six months and are going, what isgoing on here? well, the math tab in the center of my circle, i grew up in the financial services business doing it for almost 30 years. i’ve studied these companies for decades. this is how i made my money in the early 90s with at the time its was wells fargo. wells fargo was going bust. everybody was shorting wells fargo. well, it only one up seven or eight times in as many years. i don’t know how the banks are going to work out this time, but they’re very cheap. they’re priced to fail. and we’re going to make some good money. bruce, another high profilenonfinancial situation you were involved with at st. joe, a realestate holding company down there in florida. on the other side of that, david einhorn now. bring us up to date. that was a situation where you were not happy with management and you did want change. bring us up to date in terms of what’s happening at st. joe or where you stand on that. since february, we’ve been going through all the assets of the company. if you asked us, we’re looking under the ground, we’re looking over, we’re better understanding the airport. the airport has about 20 flights a day now coming in and they’re trying to figure out the best and better use for all the lay-ups. there’s nothing more we’ve dramatically produced our expenses. we’re going to stop the bleeding. we’re going to wait and let the market come to us. 80% of it is within 20 miles of the gulf of mexico. some of the most beautiful beaches in the world, it’s going to take time.all right. they’re reasonable people. discuss the price, but we have dozens of projects that are in the works. a man who is waiting and is willing to be patient. bruce berkowitz, thank you, as always, for joining us. i hope your voes gets better. i look forward to you joining us in studio where i can reach out and touch and you have that nice voice fully functioning again. thank you. you’re very welcome. that does it for strategy session, by the way.