01 September 2009

PRGN: Financial Gauge Analysis for the June 2009 Quarter

In an earlier post, we examined Paragon Shipping's (NASDAQ: PRGN) Income Statement for the June quarter.  Earnings in this period, the second quarter of 2009, fell from $0.91 to $0.48 per share.  Net income excluding various items increased from $0.49 to $0.51 per share.

We have since mined the financial statements in Paragon's earnings announcement and the separately released Management's Discussion and Analysis to update the metrics we use to assess Cash Management, Growth, Profitability and Value.  Paragon does not have a long enough financial record for us to calculate meaningful Financial Gauge scores.

First, we present some background information.

Headquartered in Voula, Greece and operating since December 2006, Paragon Shipping, Inc., owns and charters ships that carry dry bulk cargoes.  The company, which is officially registered in the Marshall Islands, went public in August 2007.

Chairman and CEO Michael Bodouroglou also controls Allseas Marine S.A., which manages Paragon's 12-ship fleet.  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. 

Last year's historic plunge in shipping rates, as reflected in the Baltic Dry Index, caused Paragon's share price to tumble from $21 in June 2008 to $2.37 in November.  The shares have generally traded at a price between $3 and $6 in 2009 to date.

SOURCE: http://www.dryships.com/pages/report.asp

Since Paragon charters its vessels under long-term contracts, the company's Revenue did not immediately follow the BDI's fall.  However, current market rates must apply to charter renewals and new deals if Paragon is to keep its vessels active.  A rate reduction well before charter expiration might also have to be considered to prevent an early termination of the arrangement.  If the new terms with a lower daily rate extend the contract period, it can benefit both parties.

This press release reports some of the actions Paragon has taken with respect to its time charters. 

In 2009's second quarter, Paragon entered into new two-year time charters for two vessels.  Paragon vessels are now expected to be under contract for 84 percent of the days in 2010 and 66 percent of 2011.

Lower rates, logically enough, have also reduced the value of the vessels themselves.  As described below, lower values has put pressure on Paragon's ability to obtain funds.

Paragon is selling the Handymax bulk carrier MV Blue Seas for $17.55 million, less a 3 percent commission.  However, when the sale is closed, a $25.8 million loan will come due.  As a result of this disparity, Paragon recorded an asset impairment charge of $6 million during the second quarter.  The company has not recognized impairments to its other vessels; however, the carrying values on the Balance Sheet should be treated with a fair amount of skepticism.

The current and historical values for the financial metrics we track are listed below, with some brief commentary.   As mentioned above, gauge scores would not be meaningful given Paragon's limited existence as a public company.

Cash ManagementJun 2009Mar 2009Jun 2008
Current Ratio2.10.93.5
Debt/CFO (years)
Inventory/CGS (days)N/AN/AN/A
Finished Goods/InventoryN/AN/AN/A
Days of Sales Outstanding (days)
Working Capital/Invested Capital10.9%-1.1%10.6%
Cash Conversion Cycle Time (days)-29.2-22.9-23.3

Paragon could not draw additional cash from its credit facilities because the vessels securing these facilities had fallen in value.  According to the Form 6-K submitted on 7 April 2009 to the SEC,

As a result of the decline in the value of our vessels securing the six credit facilities that we are party to, as of December 31, 2008 we did not meet the security cover and certain of the financial covenants contained in those credit facilities. During the first quarter of 2009, we have amended four of our existing credit facilities, have entered into an agreement with the lender to amend our fifth credit facility and we have refinanced our sixth credit facility with a replacement credit facility with the same lender. The terms of the amendments that we have entered into or have agreed to enter into and our replacement credit facility waive our prior breaches of covenants relating to (i) security coverage ratios, (ii) market adjusted net worth requirements and (iii) indebtedness to total capitalization ratios or market value adjusted total assets as contained in the applicable credit facilities and temporarily suspend or amend such covenants. As of December 31, 2008, we had an aggregate of approximately $387.5 million of outstanding indebtedness, of which approximately $53.2 million was payable within 2009 after giving effect to the 2009 amendments and refinancing. Subsequent to the amendments and refinancing of our credit facilities, we may not draw any additional amounts under these facilities.

[emphasis added]

The company, which had a total debt of $362 million on 30 June, turned to the equity market to increase its Working Capital.

Paragon raised $42.6 million in cash during the second quarter by selling 10 million common shares to the public.  The company then initiated a second 10 million share offering.  About half the shares in the second offering had been sold by 30 June 2009. 

To put these offerings in perspective, Paragon had about 27 million shares outstanding on 31 December 2008.  By 30 June 2009, the number of shares outstanding reached 42 million.

GrowthJun 2009Mar 2009Jun 2008
Revenue growth30.9%63.4%#N/A
Operating Profit growth8.3%-3.9%N/A
CFO growth31.7%72.6%284.2%
Net Income growth88.0%389.1%#N/A
Growth rates are trailing four quarters compared to four previous quarters.

The company grew at rapid, but unsustainable, rates during its start-up phase.  As a result of current economic conditions, the growth rates will contract significantly.

ProfitabilityJun 2009Mar 2009Jun 2008
Operating Expenses/Revenue41.5%42.1%61.0%
Free Cash Flow/Invested Capital2.6%1.6%-106.8%
Accrual Ratio11.1%14.3%48.6%

Operating expenses as a percentage of Revenue have stabilized.  ROIC has held up, but previous capital expenditures to expand the fleet has depressed Free Cash Flow.

ValueJun 2009Mar 2009Jun 2008
P/E vs. S&P 500 P/E
Enterprise Value/Cash Flow (EV/CFO)4.04.610.8

A Price to Earnings ratio under two, and a PEG well under one may get some attention from value investors.  However, the figures indicate that investors believe, for a good reason, that profits per share won't be returning to previous levels.

Paragon's reliance on longer-term charters protected the company's Revenue, at least initially, from the economic downturn.  However, Paragon was affected in the following way:  Less demand for bulk goods led to big cuts in shipping rates; lower rates reduced the value of the vessels themselves;  when used as collateral, the vessels covered less debt; to meet obligations, funds had to be raised by issuing new shares; the interests of the previous shareholders interests were greatly diluted.

Full disclosure: Long PRGN at time of writing.

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