This post provides an abbreviated GCFR analysis of the financial statements, which were prepared in accordance with U.S. GAAP and are expressed in U.S. Dollars. Paragon is too new to compute gauge scores, but we have calculated many of the financial metrics that drive our gauges.
Paragon Shipping, Inc., (NASDAQ: PRGN) is a dry bulk cargo transporter officially registered in the Marshall Islands but with headquarters in Voula, Greece. The company, which was formed in 2006, owns a fleet of 12 carriers of three different types for shipping dry goods in bulk. The twelfth vessel, the Friendly Seas, was added on 5 August 2008. The purchase price was $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 last year 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 $318 million in debt assumed in 2007, have been used to expand the company's fleet.
Paragon's share price has collapsed along with the Baltic Exchange Dry Index.
The drop in shipping rates hasn't yet hurt Paragon significantly because its vessels are chartered under long-term contracts. The question is whether customers will seek to terminate or negotiate these charters to reflect current market conditions. One also suspects that Paragon will act opportunistically during this period of turmoil to acquire vessels that other firms consider surplus.
Before we examine the financial metrics associated with GCFR gauges, we will review the latest quarterly Income Statement. We didn't make any projections for the quarter.
Please note that the tabular format below, which we use for all analyses, can and often does differ in material respects from company-used formats. A common difference is the classification of income and expenses as Operating and Non-Operating. The standardization is simply for convenience and to facilitate cross-company comparisons.
| ($ 000) | September 2008 (actual) | (actual) | |
| Revenue (1) | 41,450 | 18,209 | |
| Op expenses | |||
| CGS (2) | (6,792) | (2,918) | |
| Depreciation | (8,435) | (4,226) | |
| SG&A (3) | (2,187) | (22,279) | |
| Other | 0 | 0 | |
| Operating Income | 24,036 | (11,213) | |
| Other income | |||
| Asset sales | 0 | 0 | |
| Interest, etc. | (5,137) | (2,938) | |
| Pretax income | 18,899 | (14,152) | |
| Income tax | (0) | (0) | |
| Net Income | 18,899 | (14,152) | |
| $0.69/sh | ($0.81)/sh | ||
| Shares outstanding (4) | 27,208 | 17,492 |
2. Voyage expenses + Vessel operating expenses + Dry-docking expenses
3. Management fees + G&A expenses (including share-based compensation)
4. Weighted average number of Class A, common shares, diluted
Revenue in the September 2008 quarter was nearly 2.3 times that of the September 2007 period. The average number of vessels in Paragon's fleet increased from 7.2 to 11.6.
The Cost of Goods Sold was 16.4 percent of Revenue in the latest quarter, which translates into a Gross Margin rose from 83.6 percent. In the year-earlier quarter, the margin was 84.0 percent.
Depreciation dropped from 23.2 percent of Revenue to 20.4 percent.
Sales, General, and Administrative (SG&A) expenses, in which we include related-party management fees, were 5.3 percent of Revenue. In the September 2007 quarter, these expenses included an extraordinary $19.8 million charge for share-based compensation.
Operating Income turned from a large loss to a $24 million gain. Operating Income was 5.5 percent more than in the June 2008 quarter.
Non-operating expenses increased by 75 percent. A significant proportion of this increase was due to a $1.5 million loss on an interest rate swap. The swap had resulted in a $4.1 million profit in the second quarter of 2008.
Paragon paid no income taxes in either period.
Net Income reversed the large loss in the September 2007 quarter, but it fell $5.7 million short of the immediately preceding June 2008 quarter.
| Cash Management | September 2008 | 3 months ago |
| Current Ratio | 2.0 | 3.5 |
| LTD/Equity | 118.7% | 108.5% |
| Debt/CFO | 5.1 yrs | 5.2 yrs |
| Inventory/CGS | N/A | N/A |
| Finished Goods/Inventory | N/A | N/A |
| Days of Sales Outstanding (DSO) | 1.5 days | 1.7 days |
| Working Capital/Market Capitalization | 5.4% | 7.5% |
| Cash Conversion Cycle Time (CCCT) | N/A | N/A |
The cash that Paragon obtained as a result of the IPO and debt offerings is being invested in its fleet. The ratio of Debt to Cash Flow from Operations could be a concern, but recent Cash Flow growth, if it can be maintained, will bring the ratio down.
| Growth | September 2008 |
| Revenue growth (1) | 170% |
| Revenue/Assets (2) | 22.5% |
| CFO growth (1) | 128% |
| Net Income growth (1) | N/A |
2. Annualized based first two quarters
Since Paragon is so new, we can't compute year-over-year growth rates in our normal fashion. The growth rates shown above compare the first three quarters of 2008 to the first three quarters of 2007. Revenue/Assets compares Revenue in the first three quarters to the average value for Total Assets during this period, and it has been multiplied by 4/3 to approximate an annual rate.
| Profitability | September 2008 |
| Operating Expenses/Revenue(1) | 43.3% |
| ROIC | 13.1% |
| FCF/Equity | -58.7% |
| Accrual Ratio | 33.2% |
Free Cash Flow is negative because capital expenditures to acquire vessels has exceeded Cash Flow from Operations. However, once the company gets past its startup phase, we would expect the pace of fleet expansion to slow significantly.
| Value | September 2008 |
| P/E | 3.5 |
| P/E to S&P 500 average P/E | 21% |
| Price/Revenue | 1.6 |
| Enterprise Value/Cash Flow (EV/CFO) | 7.3 |
During the third quarter, Paragon shares fell in price from $16.79 to $8.52. The price is now closer to $5. The ratios in the table above were computed using the quarter-end price.
Paragon's valuation ratios can be compared with other companies in the Shipping industry.
As Paragon matures, its growth pace will stabilize and its financial data will become more suitable for GCFR analysis. We would also suggest that potential investors consider corporate governance.
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