PRGN: Financial Gauge Analysis for the September 2009 Quarter

In a previous article, we examined Paragon Shipping's (NASDAQ: PRGN) Income Statement for the third quarter of 2009.  Earnings in this period, which ended on 30 September, fell from $0.59 to $0.40 per share.  The average number of shares outstanding increased by 64 percent, relative to the same quarter of last year, as a consequence of two dilutive equity offerings earlier this year.

Using the financial statements in the earnings announcement and the separately issued Management's Discussion and Analysis of Financial Condition and Results, we have now updated our usual set of Cash Management, Growth, Profitability and Value metrics.  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 fleet.  Paragon generally charters its 12 ships (one of which will soon be sold) 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. 

An 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: StockCharts.com


Since Paragon charters its vessels under long-term contracts, the company's Revenue does not immediately follow changes in the BDI.  However, a charter agreement that expires has to be replaced by one that is consistent with current market rates, or the vessel may be idled.

Lower rates can even have an effect before charter expiration.  For example, if a vessel owner fears a charterer might terminate an agreement early, he might accept a lower rate prior to expiration.  In return, the owner might expect an extension of the charter duration.

This press release reports some of the actions Paragon took earlier this year with respect to its time charters.

Paragon is managing to keep its vessels employed.  On 4 November 2009, the company reached a new two-year (give or take) time charter agreement involving the "Sapphire Seas."

Assuming all options exercised, the Company has secured under such contracts 100%, 90% and 45% of its fleet capacity in the remainder of 2010, in 2011 and in 2012, respectively.

Lower rates, not surprisingly, have also reduced the value of the vessels themselves.  As a result, Paragon has had to amend or refinance the credit facilities secured by its vessels.  To raise funds, Paragon sold a total of 20 million common shares, in two equity offerings, greatly diluting the interests of the earlier shareholders.

In addition, Paragon agreed to sell one of its vessels, 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 asset impairment charges totaling about $6.7 million.  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.  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 Management	Sep 2009	Jun 2009	Sep 2008
Current Ratio	2.2	2.1	2.0
LTD/Equity	63.8%	77.5%	118.7%
Debt/CFO (years)	3.8	4.1	5.1
Inventory/CGS (days)	N/A	N/A	N/A
Finished Goods/Inventory	N/A	N/A	N/A
Days of Sales Outstanding (days)	4.3	3.8	1.8
Working Capital/Invested Capital	16.3%	10.9%	5.3%
Cash Conversion Cycle Time (days)	-24.4	-26.5	-31.3

Paragon issued 20.9 million new Class A common shares during the first nine months of 2009, which added about $83 million to Shareholders Equity.   The additional capital reduced the Long-term Debt to Equity ratio and boosted Working Capital.

Growth	Sep 2009	Jun 2009	Sep 2008
Revenue growth	8.0%	30.9%	203.2%
Revenue/Assets	19.6%	20.4%	19.8%
Operating Profit growth	-3.7%	8.2%	386.0%
CFO growth	11.0%	31.7%	171.6%
Net Income growth	-6.1%	88.0%	N/A

Growth rates are trailing four quarters compared to four previous quarters.

In its start-up phase, Paragon was able to increase Revenue and Cash Flows rapidly by expanding its fleet size and enjoying robust shipping rates.   Now, however, the company is getting ready to complete the sale one of its twelve vessels and rates are less lofty. 



The average daily revenue per vessel (time charter equivalent) fell 8.5 percent on an unadjusted basis and 1.7 percent after adjustments.  The latter figure excludes non-cash "amortization of below market acquired time charters."

Profitability	Sep 2009	Jun 2009	Sep 2008
Operating Expenses/Revenue	41.1%	41.7%	43.6%
ROIC	15.1%	15.8%	16.2%
Free Cash Flow/Invested Capital	13.7%	2.6%	-35.6%
Accrual Ratio	1.3%	11.1%	33.2%

Operating expenses as a percentage of Revenue have decreased.  ROIC has weakened somewhat, but a cutback in capital expenditures has helped Free Cash Flow.

Value	Sep 2009	Jun 2009	Sep 2008
P/E	3.0	1.9	3.5
P/E vs. S&P 500 P/E	0.1	0.1	0.2
PEG	N/A	0.2	0.0
Price/Revenue	1.2	0.7	1.6
Enterprise Value/Cash Flow (EV/CFO)	4.2	4.0	7.3
Share Price ($)	$4.24	$3.64	$8.52

A low single-digit Price-to-Earnings ratio, and a PEG well under one, may get some attention from value investors.


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.  The lower rates have, in turn, made vessels such as those owned by Paragon less valuable.  Since the vessels were used as collateral, Paragon has had to raise additional capital by selling equity shares.  Earlier shareholders now own a smaller share of the company.



Full disclosure: Long PRGN at time of writing.