There has been wide coverage over the clash on the valuations of St. Joe company between Bruce Berkowitz and David Einhorn. Both of them are great value investors. But they have contrary views on St. Joe. Bruce Berkowitz is buying the shares, and wants to buy all the shares if possible, while David Einhorn is shorting the stock.
These are the related articles we have published about this topic:
In this article we do not intend the evaluate St. Joe, and we are not siding with either Mr. Berkowitz or Mr. Einhorn. We would like to take this opportunity to explain the limitations of the discounted cash flow (DCF) model. The reason we write this article is because since Mr. Einhorn published his short thesis on JOE, his received critiques from JOE defends. Some of the defenders base their valuation on the DCF analyses.
If you are not familiar to DCF model, go to our DCF Calculator and type in a stock symbol there. Our calculator will automatically search the financial data of the stock, and give you the fair value of the companies based on default settings, which you can modify. The details of how the calculations work can be found in this article: How to calculate intrinsic value using discounted cash flow model?
David Einhorn wrote in his third quarter shareholder letter that there were two defenders; both of them tried to use DCF model to evaluate St. Joe. The first one arrived at a $22 per share value for JOE; the other one came to a value of $50 per share. David Einhorn’s team looked into the DCF model used by the second defender, and changed the gross margin assumption on developed properties from 100% to the historical 35% that JOE achieved before the real estate market collapsed. This revised DCF calculates JOE value to be about $5 per share.
Why DCF model s give such a big difference to the value of JOE? Does that mean DCF model is useless since the valuations differ that much? If we plug JOE into our DCF calculator, the default result is $5.32. But we do have a warning in red in the page which says: “Result may not be accurate due to the low predictability of business.”
In the calculation of the intrinsic values of companies with DCF, there are a lot of assumptions and projections. One projection here is the growth rate of the company in the future years. This will require that operation of the business be highly predictable to make accurate estimations. This is also why we rank the predictability of the companies. DCF calculations can only be applied confidently to the companies that have predictable business.
GuruFocus rated a 1-star to the predictability of the St. Joe business, which means that the business is totally unpredictable. Why is that? Let’s take a look at the revenue of JOE over the past 10 years:
These are the related articles we have published about this topic:
- Buffett Might Side With Einhorn Over Berkowitz on St. Joe Position
- Poor Old JOE
- Bruce Berkowitz Responds To Einhorn: I Want To Buy You A Box Of Chocolates
- The Long And Short Of The St. Joe Company
- David Einhorn's Short Thesis on St. Joe Company
- David Einhorn's Short Thesis For St. Joe: The Highlight of The Value Investing Congress
- Clash of the Guru Titans – Einhorn vs Berkowitz Over St. Joe (JOE, Financial)
In this article we do not intend the evaluate St. Joe, and we are not siding with either Mr. Berkowitz or Mr. Einhorn. We would like to take this opportunity to explain the limitations of the discounted cash flow (DCF) model. The reason we write this article is because since Mr. Einhorn published his short thesis on JOE, his received critiques from JOE defends. Some of the defenders base their valuation on the DCF analyses.
If you are not familiar to DCF model, go to our DCF Calculator and type in a stock symbol there. Our calculator will automatically search the financial data of the stock, and give you the fair value of the companies based on default settings, which you can modify. The details of how the calculations work can be found in this article: How to calculate intrinsic value using discounted cash flow model?
David Einhorn wrote in his third quarter shareholder letter that there were two defenders; both of them tried to use DCF model to evaluate St. Joe. The first one arrived at a $22 per share value for JOE; the other one came to a value of $50 per share. David Einhorn’s team looked into the DCF model used by the second defender, and changed the gross margin assumption on developed properties from 100% to the historical 35% that JOE achieved before the real estate market collapsed. This revised DCF calculates JOE value to be about $5 per share.
Why DCF model s give such a big difference to the value of JOE? Does that mean DCF model is useless since the valuations differ that much? If we plug JOE into our DCF calculator, the default result is $5.32. But we do have a warning in red in the page which says: “Result may not be accurate due to the low predictability of business.”
In the calculation of the intrinsic values of companies with DCF, there are a lot of assumptions and projections. One projection here is the growth rate of the company in the future years. This will require that operation of the business be highly predictable to make accurate estimations. This is also why we rank the predictability of the companies. DCF calculations can only be applied confidently to the companies that have predictable business.
GuruFocus rated a 1-star to the predictability of the St. Joe business, which means that the business is totally unpredictable. Why is that? Let’s take a look at the revenue of JOE over the past 10 years: