Paragon Shipping Income Statement Analysis for June 2009 Quarter

Paragon Shipping, Inc., (NASDAQ: PRGN) earned $0.48 per share in the three months that ended on 30 June 2009, down from $0.91 in the second quarter of last year. The company trumpets that net income adjusted to exclude various non-cash items increased from $0.49 to $0.51 per share.

Headquartered in Greece and operating since December 2006, Paragon owns and charters ships that carry dry bulk cargoes. Chairman and CEO Michael Bodouroglou also controls the company, Allseas Marine S.A., that Paragon pays to manage its fleet.

This post examines the Income Statement for the quarter. We did not issue a "look-ahead" estimate in advance of the earnings release.

In a second article, we will provide the latest figures for the financial metrics we use to analyze Cash Management, Growth, Profitability and Value.

Our sources were the earnings announcement and the separately released Management's Discussion and Analysis.

Please click here to see a full-sized, normalized depiction of the actual and projected results for the just-concluded quarter, as well as the quarterly Income Statements for the last couple of years. Please note that our organization of revenues, expenses, gains, and losses, which we use for all analyses, can and often does differ in material respects from company-used formats. The standardization facilitates cross-company comparisons.

Revenue (after commissions totaling 5.2 percent) in the June 2009 quarter was 3.7 percent greater than in the second quarter of 2008. The average daily revenue per vessel (time charter equivalent) fell 5.6 percent, but Paragon operated one more vessel in the recent period.

We group the Voyage expenses, Vessel operating expenses, and Dry-docking expenses reported by Paragon, and we call the result the Cost of Goods Sold. CGS was 12.3 percent of Revenue, which translates into a Gross Margin of 87.7 percent, in the June 2009 quarter. The Gross Margin was 85.7 percent in last year's second quarter.

The improved Gross Margin was largely due to a reduction in Dry-docking expenses. This cost was cut from $510 thousand, which was used last year for dry docking of two vessels, to only $25 thousand. Vessels this year were inspected in lieu of dry docking.

Because Paragon owned an additional vessel in 2009, Depreciation expenses rose from 20.3 percent of Revenue last year to 21.6 percent.

Sales, General, and Administrative (SG&A) expenses, in which we include management fees, were 4.7 percent of Revenue. These expenses were 6.5 percent of Revenue last year.

The management fee was $746 per day per vessel in the second quarter, plus reimbursements for legal, accounting, and financial services.

G&A costs were cut from $1.6 million to $1.0 million.

Paragon recorded an asset impairment charge of $6 million on one vessel, the Handymax bulk carrier MV Blue Seas, which will be sold for $17.55 million (less a 3 percent commission) later this year. The Blue Seas must have been carried on Paragon's books for $23.9 million prior to the (25 percent, give or take) impairment charge.

No other vessel in the fleet was deemed impaired by Paragon, but it would be reasonable to suspect a general decline in valuations.

The impairment charge was the main reason Operating Income fell 17 percent to $18.9 million. Excluding the charge, Operating Income would have risen about 8 percent.

Other expenses of $3 million brought Net Income to $15.8 million ($0.48 per share), compared to $24.6 million ($0.91 per share).

Paragon paid no income taxes in either period.

Full disclosure: Long PRGN at time of writing.

Comments

[bfras921:]

other assets are impaired, so, you need to subtract from equity the value of the underwater assets

sorry, i know you are long, but please post all facts

Aug 14 08:21 AM

[Alan Young:]

I think "underwater assets" are on an even keel in this business. :-)


On Aug 14 08:21 AM bfras921 wrote:

> other assets are impaired, so, you need to subtract from equity the
> value of the underwater assets
>
> sorry, i know you are long, but please post all facts

Aug 14 02:53 PM

[Bradley Kavin:]

which assets are you referring to bf that you consider to be underwater?

Aug 15 08:42 PM

[bfras921:]

how many assets do they have, Bradley? Did you write this article or your little brother??

get a clue, the ships, you clueless dope

they bot capes for 135 , new ones are going for 60 m

they just sold one ship and took a 6 m hit.

The value of the ships are overstated

Aug 16 12:31 PM

[Bradley Kavin:]

The company reported equity on their balance sheet of around $400 million, up from the previous quarter. Lets say those assets are over stated by 50%, and their equity is in fact $200 million, then the company is still selling relatively cheap at $180 million (this is including recent shareholder dilution). Granted their shipping rates are correlated with the Baltic Dry Index which has taken a hit, they have signed 85% of their shipping agreements for 2010, and 2009 is completely booked.

If the shipping rates they signed for 2010 are consistent with the ones presently in place in terms of rates, the company could earn roughly $60 million in net income this year alone, putting their sale price (share price) at 3 times net income. If they were to for some reason or another earn nothing in net income for the next two quarters, their share price would be 6 times earnings.

Granted, their assets (mostly ships) have lost value, they have not however lost their ability to move dry goods. Their business is not to buy ships that gain value, but simply to use them for the sole purpose of transport. Ask yourself, "Will the Baltic Dry Index recover as the economy recovers over time? Will Paragon need to sell more ships in order to raise equity after their recent offering?".

BF, I've done my homework, have you?

Aug 19 07:05 AM

[ramisle:]

I have no idea why so many people think that the fact that they are 100% chartered for 2009, is any guarantee that their earnings won't change.
In June and July, the following changes were made to their future revenue expectations. By Jan, 2010 they will have "locked in" Charters which will bring in $8 million less per quarter.

Calm Seas from $37,000 per day, to $15,775 per day
Deep Seas from $34,250 per day, to $15,000 per day
Pearl Seas from $51,300 per day, to $37,300 per day
Coral Seas from $54,000 per day, to $15,775 per day
Sapphire Seas from $26,750 per day, to $22,750 per day

And to top it off, they will now have 47 million shares outstanding.
There's no need to assume anything, The SEC has everything.
and ship values at
cotzias.gr

Sep 05 03:50 PM

[Bradley Kavin:]

I'm not trying to say that their revenue in terms of dollars wont change, but they have an advantage by having a full (if at worst, 80%) charter schedule.

No doubt the company is facing a tough time right now, but the price (including shareholder dilution) is too low in contrast to their future earnings power as the bdi recovers, and the value of the ships as the bdi recovers. Imagine if you bought every company facing a tough time that would survive, and sold when the economics of the business recovers (in which case shipping will eventually recover).

I think timing stocks is impossible, but I dont think pricing is.

Sep 21 05:42 AM

[ramisle:]

I understand the desire to bottom feed. In the hopes that a company will return to past performance. But there are two roadblocks for PRGN. The massive amount of new ships will depress charter rates and the low values on ships will mean PRGN will remain in breach of loan covenants, unless it pays down debt. That will require more dilution. The same people that said the brief recovery in the BDI in May was unsustainable, (and they were right), are the people who say rates will be depressed for two years. The delivery of new ships will outweigh the growth in demand. More than the best estimates of world wide GDP growth.
Aside from the occasional run-up because of momentum traders this will be dead money. Look at the SEC filings, they have set charters that will result in $8 million less per quarter, how will that be received by the market. The future earnings power you seek, is further away than you anticipate. Timing stocks may be impossible, but there is money to be made elsewhere, and you will be able to buy this at the same price much later. I don't make price predictions, but the hit to earnings, is real, documented, and I can't imagine a scenario where it will be ignored. I know many people talk about the foresight of the market, but these days the market has the attention span of a gnat.

Sep 22 08:11 PM

[Bradley Kavin:]

I completely agree with you that paragon is in for a hard time for some time. But this is how I evaluate it

If paragon looses 8 million in revenue per quarter, at their current operating levels (costs etc) at a low line their net income could be estimated at around 10 million per quarter. Lets even say 8 million per quarter

At 10 million on average per quarter for four quarters, a low valuation for the company would be 400 million dollars. At 8 million per quarter, 360 million..

The company is selling for 198 million. Although the company shouldn't be trading at a high pe ratio because of the current shipping industry condition, the price is simply too low. The company would have to begin earning less than 5 million in net income per quarter for the stock to be overvalued.

The other aspect of the company is its long term shipping contracts. I'm not trying to say that the BDI will ever recover to its previous levels soon, or ever for that matter. But the volatility in the BDI has less of an effect on paragon than it does on other shipping companies.

Paragon has outstanding debt payable in 2009 of $52.2 million. After their $47 million offering, as well as the sale of their Handymax Blue seas for $17.55 million and their already substantial cash position, their not going bankrupt. Granted, a $25.8 million loan came due immediately after the sale of their handymax. This resulted in a $6 million asset impairment charge, which quickly evaporated the 8% aftermarket gain due to their recent earnings release.

It's the margin of safety that attracts me to this business, and its secure cash flow due to long term contracts.

Also, please dont interpret my opinion as hostile in any way. I'm here to learn, and truly enjoy discussing these things with others as it only feeds my desire for knowledge.

Sep 24 05:02 AM