Paragon Technologies Beginning To Look Appealing

| About: Paragon Technologies, (PTG)
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Paragon Technologies (PTG) is a manufacturer of automated material handling solutions for companies like BMG, Peterbilt, Honda, CVS Pharmacy, Maybelline, and Walgreens, as well as the U.S. Postal Service. Its products handle material flow for production & assembly operations (manufacturing) and material handling for order fulfillment (distribution & warehousing).

Paragon's total market capitalization per Yahoo! is only $17.68 million, and over 2/3 of that is backed by cash & short-term investments. As of September 30, 2006, PTG had $12.86 million in cash & short-term investment and no long-term debt. Current assets were $17.33 million versus only $4.01 million in current liabilities.

Paragon is also profitable. Last quarter, Paragon posted net income of $239k (or $0.07 basic EPS), compared to net income of $141k (or $0.03 basic EPS) for the prior year quarter. Revenues rose 27% over the prior year quarter to $5.2 million. Commenting on the quarter, CEO Joel Hoffner stated:

"Our increase in sales during the quarter is a natural consequence of the extraordinary backlog coming into the quarter. The lower order entry rate during the quarter is related to the nature of our business, which often sees pending orders delayed as our customers synchronize their capital expenditures with their operational needs. Orders received in October, plus customer directives that will most probably transform to orders in the fourth quarter, would restore our backlog to the levels recorded for the beginning of this year. Our pending order pipeline has some exciting prospects that should impact us early next year."
So why have Paragon's shares lost about 45% of their value over the last six months? I'm not sure of all the reasons, but the high volume decline at the end of October looks like it was caused by the company's announcement that it would like to make a strategic acquisition. Perhaps investors are concerned that the company will pursue an unwise acquisition, but more likely the announcement dashed hopes of a buyout of Paragon itself, or a large special dividend.

The idea of an acquisition doesn't bother me. My own research into this area indicates that many small companies trade at reasonable valuations. Any acquisition would therefore probably be accretive to earnings. I even have a suggestion for management: robotic warehouse automation company Transbiotics (OTCPK:TNSB).

Paragon is near the top of my watch list. I haven't made any purchases yet, but expect that I will soon. I'd like to see the late October lows hold and share price cross above the 50-day moving average. If PTG can do that, it should offer a great risk-to-reward proposition.

DISCLOSURE: I have no position in PTG. I am long TNSB.OB.

PTG 1-yr chart: