26 May 2010

PRGN: Financial Gauge Analysis for the March 2010 Quarter

Paragon Shipping, Inc., (NYSE: PRGN) earned $0.185 per share on a GAAP basis in 2010's first quarter, which ended on 31 March 2010.  Reported earnings per share were 74 percent less than the $0.71 Paragon made in 2009's first quarter. 

Adjusted Net Income, which excludes various non-cash items, fell from $0.54 per share to $0.16.  An 83-percent increase in the weighted average number of diluted Class A common shares steepened the per-share declines.

We previously reviewed Paragon's Income Statement for the quarter in some detail.

We have now updated the various financial metrics we use to analyze Cash Management, Growth, Profitability and Value.  This post reports on the metrics for Paragon Shipping, which were calculated using data from Paragon's current and historical financial statements, including the latest formal submission for the March 2010 quarter.

Paragon does not have a long enough financial record for us to calculate meaningful financial gauge scores.

Paragon Shipping owns and charters ships that carry dry bulk cargoes.  The company is headquartered in Greece and has been operating since December 2006.  Paragon generally seeks to secure one-to-five year, fixed-rate charters for its vessels; this strategy dampens the effect of industry volatility on the company.  In 2010, charter arrangements have been made for all vessels throughout the year.

The Baltic Dry index of shipping rates, shown in the diagram below from StockCharts.com, plunged in 2009.  The index has been slowly recovering, with a few fits and starts, during the last 18 months.

In the first quarter of 2010, Paragon took significant steps to expand and diversify its fleet.  The company purchased for $41 million a Panamax-class drybulk carrier that was built in China last year.  Paragon will take delivery of this vessel, which the company calls the "Dream Seas," in the summer of 2010.  Paragon has already arranged a three-year charter for the Dream Seas, which will become the eighth Panamax vessel in the Paragon fleet.

A second expansion step was to contract for the construction of eight new vessels for delivery in 2011 and 2012.

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.  Readers are encouraged to verify these figures and calculate others as they see fit using the filings available at the SEC's web site and elsewhere.

Cash Management31 Mar 201031 Dec 200931 Mar 2009
Current Ratio3.42.40.9
Debt/CFO (years)
Inventory/CGS (days)15.415.013.2
Finished Goods/InventoryN/AN/AN/A
Days of Sales Outstanding (days)
Working Capital/Invested Capital54.5%36.0%15.3%
Cash Conversion Cycle Time (days)-14.5-17.5-27.2

Paragon held $131 million in Cash and Cash equivalents and another $31 million in short-term Restricted cash on 31 March 2010.   The Cash total exceeds the company's Current liabilities of $49 million. 

Ample reserves of cash should help the company pay for the new vessels it expects to receive over the next few years.

Long-term debt is $262 million, down from a high of $370 million in September 2008.  Long-term debt as a percentage of shareholders' equity has been reduced from a high of 119 percent to 56 percent.  The reduction in Debt/Equity was aided by two equity offerings, totaling 20 million shares, in 2009 that brought Paragon $83.75 million.  The proceeds also contributed to the increase in Working Capital.

Growth31 Mar 201031 Dec 200931 Mar 2009
Revenue growth-11.6%-5.2%63.4%
Operating Profit growth-43.6%-35.8%-4.0%
CFO growth-17.8%-3.7%72.6%
Net Income growth-23.4%-5.1%389.1%
Growth rates are trailing four quarters compared to four previous quarters.

The weak economy worldwide has lowered shipping rates, charter rates, and profits. 

Profitability31 Mar 201031 Dec 200931 Mar 2009
Operating Expenses/Revenue48.8%44.7%42.4%
Free Cash Flow/Invested Capital11.8%13.1%1.6%
Accrual Ratio-5.0%3.2%14.3%

Lower Revenue has also reduced the Operating Margin and the Returns on investment.  The lower Accrual Ratio is a positive with respect to Earnings quality.

Value31 Mar 201031 Dec 200931 Mar 2009
P/E vs. S&P 500 P/E
Enterprise Value/Cash Flow (EV/CFO)
Share Price ($)$4.66$4.55$3.49

The share price has fallen to near $4.00 so far in the second quarter, which reduces an already low P/E ratio even further.  However, if earnings continue to slide, the P/E will rise even if the share prices remains constant.

The company's equity offerings have resulted in substantial earnings dilution.

The earnings decline makes the PEG ratio immaterial.

Because of the economic downturn, there has been less worldwide demand for bulk goods.  Shipping rates for transporting these goods are not as low as they were 12 months ago, but they are still down considerably from their peak.  Paragon is planning for better times by raising cash and making arrangements to expand substantially the number of vessels in its fleet.

Full disclosure: Long PRGN at time of writing.

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