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Market observer with legal background and interest in financial services, physical commodities trading, shipping and irrational exuberance. Values entrepreneurship and good governance, may also use some behavioral investment/contrarian criteria.
  • Paragon Shipping, Safe Bulkers and Operational Costs in Dry Bulk Shipping 2 comments
    May 26, 2011 6:33 PM | about stocks: PRGN, SB
    Paragon Shipping's (NASDAQ:PRGN) Q1 numbers, just out, provide an opportunity to examine whether one should take into consideration only NAV (at market values) when valuing dry bulk shipping companies or whether one should factor in other elements, such as management quality or operational efficiency. The table below compares PRGN's Q1 income statement with that of Safe Bulkers (NYSE:SB).

    Income Statement for the Three-Month Period Ended March 31, 2011 (in $1,000)




    Safe Bulkers Paragon Shipping
    REVENUES:    
    Revenues 43,045 29,020
    Commissions -771 -1,530
    Net revenues 42,274 27,489
    EXPENSES:    
    Voyage expenses -51 -125
    Vessel operating expenses Drydocking -5,744 -5,530
      -751
    Depreciation -5,583 -8,760
    General and Administrative;
    Management fees
    -1,938 -2,830
      -1,376
    Early redelivery (cost)/income 101  
    Bad debt   -168
    Gain on sale of asset -  
    Operating income 29,059 7,949
    OTHER (EXPENSE) / INCOME:    
    Interest expense -1,716 -2,400
    Other finance costs -57  
    Interest income 286 41
    Loss on derivatives -6 -179
    Foreign currency gain (loss) -169 15
    Amortization and write-off of deferred finance charges -89  
    Net income 27,308 5,425
         
    Earnings per share 0.41 0.09
    Weighted average number of shares 65,881,600 56,282,522



    Debt ($1000) 486,000 328,000
         
    Vessels Q1 16 13
    dwt 1,443,800 747,994 +2x3,426 TEU

    SB had about a 70% larger fleet than PRGN on a dwt basis and better charters, so the difference in revenue is logical. But revenue doesn't matter since we are looking at costs. Despite a much smaller fleet, PRGN managed to accrue twice as much commissions, twice as much G&A expenses (SB includes management fees in G&A - they didn't have drydocking in Q1) and a bit more in vessel operating expenses - all including large chunks of related party costs, some non-cash. More interestingly, SB has 50% higher debt but pays about 30% less interest than PRGN.

    The point is that no matter what great asset or charter deals a company is seen to be making, such super rents may be eroded by (sometimes purposefully) inefficient operation. A discount to any NAV is certainly warranted then. 

    SB and PRGN are simple to understand and this comparison is easy and revealing. It would be interesting if someone would add to the comparison companies better regarded than PRGN, such as DSX, NMM or GNK, controlling for size and age of fleet. At least Paragon's accounts are detailed and do balance, something it is difficult to say for OCNF for example, which appears to be a black hole. 

    EDIT: Q2 2011
    Income Statement for the Three-Month Period Ended June 30, 2011 (in $1,000)


    Safe Bulkers Paragon Shipping
    REVENUES:    
    Revenues 41,974 25,094
    Commissions -788 1,446
    Net revenues 41,186 23,648
    EXPENSES:    
    Voyage expenses -756 -103
    Vessel operating expenses Drydocking -6,521 -4,696
      -1,059
    Depreciation -5,645 -8,150
    General and administrative
    Management fees
    -1,954 -2,724
      -1,236
    Early redelivery (cost)/income    
    Bad debt   -84
    Gain/loss on sale of asset   -14,796
    Impairment   -5,000
    Operating income 26,310 -13,289
    OTHER (EXPENSE) / INCOME:    
    Interest expense -1,558 -2,939
    Other finance costs -43  
    Interest income 242 205
    Loss on derivatives -6,145 -1,222
    Foreign currency gain (loss) -222 -15
    Amortization and write-off of deferred finance charges -89  
    Equity in net income of affiliate   482
    Net income 19,107 -16,777
         
    Earnings per share 0.27 -0,28
    Weighted average number of shares 70,116,022 58,254,929

       
    Debt ($1000) 427,000 253,000
         
    Vessels 16 11
    dwt 1,443,800 747,994

    Same comments: while Paragon has a fleet much smaller than the one of Safe Bulkers, its expenses are much higher (ignore revenue line, and one-off items).



    Themes: Shipping Stocks: PRGN, SB
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Comments (2)
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  • AnglicoTrader
    , contributor
    Comments (127) | Send Message
     
    But . . . the $64K question is do you think PRGN is a stock to buy. I'm sitting on the fence.
    27 May 2011, 08:40 PM Reply Like
  • Adjusted Return
    , contributor
    Comments (364) | Send Message
     
    Author’s reply » Thank you for reading. As a company I think Paragon is not particularly well run. As a stock though PRGN is perhaps undervalued. General sector prospects may be part of the reason but the point made above is that inferior comparative operational performance and, in particular, overly generous management compensation should be viewed with suspicion as the value spread you thought you found is gradually eroded.
    28 May 2011, 05:19 AM Reply Like
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