PRGN: Financial Analysis through December 2008

Paragon Shipping (NASDAQ: PRGN) has announced its results for the fourth quarter of 2008 and for the full year.  

This post provides an abbreviated GCFR analysis of the financial statements.  Paragon, which was established in 2006, is too new to determine credible gauge scores, but we have calculated many of the financial metrics that drive our gauges.

Paragon Shipping, Inc., is a dry bulk cargo transporter officially registered in the Marshall Islands but with headquarters in Voula, Greece.  The company owns a fleet of 12 carriers of three different types for shipping dry goods in bulk.  The twelfth vessel, the Friendly Seas, was purchased on 5 August 2008 for $79.25 million.

Michael Bodouroglou, Paragon's CEO, is also the sole shareholder of Allseas Marine S.A., which manages Paragon's fleet.

The company went public in August 2007 when it sold almost 11 million Class A common shares in an IPO.  At $16 per share, less expenses of $1.04 per share, Paragon brought in $164.5 million.  These funds, along with $318 million in debt assumed in 2007, have been used to expand the company's fleet.

Paragon shares are now trading at a price below $4.00.  The plunge in value reflects the collapse, which began in June 2008, of the Baltic Dry Index of shipping rates.  Since Paragon had long-term contracts with the customers that had chartered its vessels, Paragon's Revenue has not followed the industry-wide falloff in rates.  However, when contracts expire, it appears now that Paragon will have to slash its charter rates to keep its vessels active. 

The downturn in global trade not only cuts shipping activity and shipping rates, it also reduces the value of the vessels themselves.  Shippers with sufficient financial resources (and a willingness to take a risk) can expand their fleets for low prices, relative to recent trends.

Before we examine the financial metrics associated with GCFR gauges, we will review the latest quarterly Income Statement.  Paragon's financial statements are prepared in accordance with U.S. GAAP.  The currency is U.S. Dollars. 

We didn't make any projections for the quarter.

Please note that the tabular format below, 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.

http://sheet.zoho.com/public/ncarvin/prgn-income-statement?mode=html






Revenue in the fourth quarter was 2.1 percent more than in the third quarter, and it was 45.2 percent more than in fourth quarter of 2007.  Revenue in all of 2008 exceeded than Revenue in 2007 by 120 percent.  The average number of vessels in the Paragon's fleet rose from 7.2 in 2007 to 11.4 in 2008.
 
The Cost of Goods Sold -- i.e., Voyage expenses + Vessel operating expenses + Dry-docking expenses -- was 13.5 percent of Revenue in the latest quarter, which translates into a Gross Margin of 86.5 percent.  In the year-earlier quarter, the margin was 82.0 percent. 

Voyage expenses changed from a $225,000 expense in the fourth quarter of 2007 to a $13,000 credit in the fourth quarter of 2008.  Paragon defines Voyage expenses as "primarily ... port, canal and fuel costs that are unique to a particular voyage, as well as commissions."  It's not clear how these expenses could be below zero (i.e., a credit).

Depreciation increased in dollar terms from last year, but this expense dropped from 22.6 percent of Revenue in the December 2007 quarter to 20.7 percent in December 2008.

Sales, General, and Administrative (SG&A) expenses, in which we include related-party management fees, were 10.8 percent of Revenue.  These expenses were 16.6 percent of Revenue one year earlier.

Operating Income grew by 87 percent relative to the year-earlier quarter.  Operating Income was, however,  3 percent less than in the sequentially preceding quarter (September 2008).

Non-operating expenses soared 184 percent.  A significant proportion of this increase was due to a $8.8 million loss in the December 2008 quarter on an interest rate swap.  The loss on this swap was only $1 million in the fourth quarter of 2007.

Paragon paid no income taxes in either period.

Net Income was 28.5 percent greater than in the December 2007 quarter.

Cash Management	December 2008	3 months prior	12 months prior
Current Ratio	1.0	2.0	1.5
LTD/Equity	108%	119%	112%
Debt/CFO	4.6 years	5.1 years	7.4 years
Inventory/CGS	N/A	N/A	N/A
Finished Goods/Inventory	N/A	N/A	N/A
Days of Sales Outstanding (DSO)	2.5 days	1.5 days	3.8 days
Working Capital/Invested Capital	0.5%	5.3%	2.1%
Cash Conversion Cycle Time (CCCT)	-25 days	-32 days	-27 days

Paragon raised cash by selling common shares to the public and with debt offerings.  The cash was used to acquire ships that were leased to firms transporting dry-bulk cargoes.  Each new ship put into service brings in Cash Flow from Operations that makes the debt level easier to bear.  The danger is that the pull back in global trade will reduce shipping levels to such an extent that no firms will want charter Paragon's ships when current leases expire, but the debt payments will still have to be made.

Paragon had $68 million in cash and cash equivalents when 2008 ended.  This would cover the $53 million of long-term debt that has to be repaid or refinanced (if such a thing is possible) in 2009.  The company has $334 million of other long-term debt.

Growth	December 2008	3 months prior	12 months prior
Revenue growth	120%	203%	N/A
Revenue/Assets	21.7%	19.8%	11.1%
CFO growth	95%	188%	N/A
Net Income growth	1300%	N/A	N/A

Note that the growth rates above for 2008 surpass the 58.8 percent increase from 2007 in the average number of vessels in Paragon's fleet.  We don't expect to see a growth rate that large in 2009, but it is possible Paragon will take advantage of the weak economy to buy ships at distressed prices.

Profitability	December 2008	3 months prior	12 months prior
Operating Expenses/Revenue	41.2%	43.3%	79.4%
ROIC	15.1%	13.1%	1.6%
FCF/Invested Capital	0.5%	-28.6%	-66.8%
Accrual Ratio	8.6%	33.2%	58.9%

Free Cash Flow is turned positive because Cash Flow from Operations was up significantly and capital expenditures to acquire vessels were down greatly.  The lower Accrual Ratio signifies a higher quality of earnings.

Value	December 2008	3 months prior	12 months prior
P/E	1.9	3.5	98
P/E to S&P 500 average P/E	11%	19%	550%
PEG	0.0	0.0	0.0
Price/Revenue	0.8	1.6	6.6
Enterprise Value/Cash Flow (EV/CFO)	5.4	7.3	17.9

Paragon's valuation ratios can be compared with other companies in the Shipping industry.  The metrics above seem to suggest that Paragon shares, which fell in price by 74 percent in 2008, are deeply undervalued.  The earnings growth rate is so high that the PEG is zero.

Despite the economy, 2009 could be OK for Paragon because its vessels are under contract for 98 percent of the possible days.  However, Paragon will have to enter in many new chartering arrangements in 2010 and 2011.  If these arrangements were made today, they would almost certainly be on terms that include much lower day rates. 

It was reassuring that Paragon's CEO stated that the companies that charter Paragon's ships "are meeting their contractual obligations."  One can easily imagine circumstances in which financially distressed customers seek relief from, or even walk away from, long-term contracts negotiated in times when rates were much higher.