24 May 2009

PRGN: Financial Analysis through March 2009

Paragon Shipping, Inc., (NASDAQ: PRGN) earned $0.71 per share, up from $0.59, in the first quarter of 2009, which ended on 31 March.  The latest results were announced in this press release.  Typographical errors in the announcement were corrected in this 6-K/A.

This post provides an abbreviated GCFR analysis of the financial statements.  Paragon, which was established in late 2006 and went public in August 2007, is too new to determine meaningful gauge scores.  However, this post does list the financial metrics we would otherwise use to compute the scores.

First, we present some background information.

Paragon Shipping, Inc., owns and charters ships that carry dry bulk cargoes.  The company is officially registered in the Marshall Islands, but Voula, Greece, is where Paragon is headquartered.  It is important to note that Michael Bodouroglou, the Chairman and CEO,  also controls the company, Allseas Marine S.A., that manages Paragon's fleet.

The fleet now comprises 12 ships of three different types.  The twelfth vessel, the Friendly Seas, was purchased in August 2008 for $79.25 million.  Paragon generally charters its ships for extended periods -- one to five year "time charters" that have predictable revenues --  but the company can also enter into "spot charters" contracts for periods as short as a single voyage.

When  Paragon had its IPO, the company sold almost 11 million Class A common shares for $16 per share.  After expenses of $1.04 per share (is that high?), the sale brought in $164.5 million.  These funds, along with $318 million in debt assumed in 2007, have been used to build and expand the company's fleet.

In June 2008, Paragon's share price was over $21.  However, the ensuing collapse of the Baltic Dry Index of shipping rates caused the price of Paragon's share to tumble as low as $2.37 by November of that year.  In 2009, the shares have generally traded in a range between $3 and $6.  Last week, when the first quarter results were announced, the price bounced up to the higher end of the range.

Since Paragon had chartered its vessels under long-term contracts, the company's Revenue did not immediately follow the BDI's plunge.  However, as contracts expire, Paragon's charters will have to adjust to the lower market rates to keep its vessels active. 

While there are now over 700 ships idle off Singapore as consequence of the downturn in global trade, Paragon's strategy of long-term charters has prevented it from suffering this fate.  According to the press release,

" ... Paragon has 98% of its revenue days covered for 2009, 64% for 2010 and 39% for 2011 with some of the world's leading charterers."

It appears, not surprisingly, that lower rates have also reduced the value of the vessels themselves.  Well-capitalized shippers that believe the downturn is temporary could view the current period as an opportunity to expand their fleets.

Before we examine Paragon's financial metrics, we will review the latest quarterly Income Statement.  Unlike our practice with more established companies, we didn't make an earnings projection for the quarter. 

Paragon's financial statements are prepared in accordance with U.S. GAAP.  The currency is U.S. Dollars. 

The spreadsheet below displays Paragon's results in our normalized presentation.  Click here for a larger view of the spreadsheet.  Please note that the tabular format, which we use for all analyses, can and often does differ in material respects from company-used formats.  A common difference is the classification of income and expenses as Operating and Non-Operating. The standardization is simply for convenience and to facilitate cross-company comparisons.

Revenue (after commissions totaling 5.4 percent) in the March 2009 quarter was 1.6 percent greater than in the first quarter of 2008.  Positive revenue growth was achieved despite lower market rates because Paragon had one more ship operating in the latest period.  Revenue was down 7 percent from the immediately preceding December 2008 quarter.

The Cost of Goods Sold -- i.e., Voyage expenses + Vessel operating expenses + Dry-docking expenses -- was 13.7 percent of Revenue in the latest quarter, which translates into a Gross Margin of 86.3 percent.  In the year-earlier quarter, the margin was 89.0 percent. 

Dry-docking expenses fell from $112,500 to $39,700. 

Depreciation expenses were 21.7 percent of Revenue, up from 20.3 percent last year.  Paragon depreciates its vessels on a straight-line basis, assuming each has a useful life of 25 years from delivery.  The oldest ships in Paragon's fleet were built in 1995.
Sales, General, and Administrative (SG&A) expenses, in which we include related-party management fees, were 4.8 percent of Revenue.  These expenses were 5.3 percent of Revenue one year earlier.  Paragon states: 

We paid Allseas an average management fee of $783 per day per vessel during the three months ended March 31, 2009, and an amount of $50,000 that was charged by Allseas to us for legal, accounting and finance services that were provided throughout the period as per signed agreement date February 19, 2008.

Operating Income slipped 4.3 percent as higher operating cost and depreciation outweighed the small increase in Revenue and small decrease in SG&A.  Operating Income was, however, 1 percent greater than in the December 2008 quarter.

In the March 2008 quarter, Paragon recorded a $5.2 million loss on an interest rate swap, which is a financial mechanism that limits exposure to interest rate fluctuations.  The latest quarter also included a swap loss, but it was only $300,000.  The much-reduced swap loss helped slash non-operating expenses in half, and this savings enabled Net Income overcome the Operating Income decline and exceed last year's value by an eye-catching 22 percent.

Paragon paid no income taxes in either period.

Now for the metrics associated with our gauges.  As mentioned above, gauge scores are not provided because they would not be meaningful given Paragon's limited existence as a public company.

Cash ManagementMarch 20093 months prior12 months prior
Current Ratio0.91.02.9
LTD/Equity 99%109%105%
Debt/CFO 4.2 years4.6 years6.1 years
Inventory/CGS N/AN/AN/A
Finished Goods/Inventory N/AN/AN/A
Days of Sales Outstanding (DSO)3.2 days2.5 days1.4 days
Working Capital/Invested Capital -1.1%0.5%6.1%
Cash Conversion Cycle TimeN/AN/AN/A

Paragon raised cash in 2006 and 2007 by selling common shares to the public and with debt offerings.  The cash was used to purchase ships for transporting dry-bulk cargoes, and these ships were then chartered to other firms.  Each new ship put into service brings in Cash Flow from Operations that makes the debt level easier to bear.  The danger is that a sustained period of lower charter rates will depress Cash Flows, but the debt payments will still have to be made.

Paragon had $59 million in cash and cash equivalents on 31 March 2009.  This would cover the $53 million of long-term debt that has to be repaid or refinanced in 2009.  The company has $324 million of other long-term debt.

GrowthMarch 20093 months prior12 months prior
Revenue growth63.4%120%N/A
Revenue/Assets 21.7%21.7%14.8%
CFO growth 72.6%95.2%565%
Net Income growth 390%>1000%N/A
Growth rates are trailing four quarters compared to four previous quarters.

These sliding year-on-year growth rates look impressive, but it is important to note that Paragon was still in its start-up phase during the four quarters that ended in March 2008.  The company's capital structure and fleet size have been stable for the last couple of quarters, so it won't be long now before the growth rates provide a more realistic view of the company's performance.

ProfitabilityMarch 20093 months prior12 months prior
Operating Expenses/Revenue 42.1%41.2%67.1%
ROIC 8.7%15.1%5.8%
Free Cash Flow/Invested Capital 1.5%0.5%-56%
Accrual Ratio 14.3%8.6%49%

It's too early to say for sure, but the Operating Expense ratio seems to have a settled in an area that yields substantial Operating Income.

Because size of Paragon's fleet is still relatively small, and ships are expensive, each vessel purchased as an investment in the future represents a significant capital expenditure relative to present Cash Flow.  Each new vessel, therefore, temporarily depresses the Free Cash Flow ratio.  Should a year elapse without a new purchase, the FCF would increase substantially.

ValueMarch 20093 months prior12 months prior
P/E 1.31.927.3
P/E vs. S&P 500 P/E 8.3%9.8%155%
Enterprise Value/Cash Flow (EV/CFO) 4.65.412.9

A Price to Earnings ratio under two, and an earnings growth rate so high the PEG is zero, will get any value investors attention.  However, for all the reasons described above, future earnings are not assured and recent growth rates are unlikely to be repeated.

Paragon's valuation ratios can be compared with other companies in the Shipping industry.

In the March 2009 quarter, Paragon's revenue increased slightly relative to 2008 because the fleet size had expanded.  Higher operating costs were, however, more significant, and Operating Income skidded 4.3 percent.  But, the more interesting difference between the two quarters was the earlier period had a $5.2 million loss on an interest rate swap.  In the recent period, this loss was only $300,000, which made the March 2009 quarter look better by $4.8 million.  Since Net Income was only $3.4 million higher, the effect of this non-operating item is obvious.

Paragon has $53 million of long-term debt that has to be repaid or refinanced in 2009. 

Since the first quarter ended, Paragon has sold through a "Controlled Equity Offering" more than 6.2 million common shares, at an average price of $3.65.  Given the good reception to the first quarter earnings announcement, which wasn't issued until 19 May 2009, it would be interesting to learn who was fortunate enough to buy the shares at a low price.

Note: Yahoo! Finance was the source for daily closing share prices. InvestmentTools.com was the source of the  BDI chart.

Full disclosure: Long PRGN at time of writing.

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