Paragon Shipping (PRGN): Beyond the sea
When Paragon Shipping Inc. (Nasdaq: PRGN) became a public company last August, investors who didn’t set sail with the initial offering priced at $16 might have figured that they had missed the boat. Or not.
The Greek shipping company, formed in 2006, immediately faced some rough seas, with its stock price falling nearly 10% on Paragon’s first day of trading. Put an asterisk next to that drop, however, because on that day, Aug. 10, the U.S. stock markets were roiling through one of their all-too-typical gyrations southward, with the Dow Jones Industrial Average sinking as much as 320 points during the trading session.
Since then, shares of Paragon have been buffeted by the economic headwinds generated in the United States, which have blown across the globe. The young stock crested at $27.34 on Oct. 29, and recently sank as low as $12.51, on Jan. 22.
Analysts who are tracking Paragon don’t necessary believe this is a shipwreck waiting to happen. According to Thomson Financial, two analysts have Paragon at a “buy” rating, while another rated it a “hold.” The median price target calculated by Thomson is a healthy $26.50 — above Monday’s closing price of $18.
Industry estimates place the demand for seaborne dry-bulk shipping growing at better than 6% annually since 2001. While the U.S. economy struggles, the rest of the world is doing all right, with global output having grown about 5% last year. Demand for dry-bulk shipping — Paragon’s specialty — has been rising substantially for more than a decade, and the company has routes serving high-growth nations China and India, as well as other parts of Asia.
Paragon’s headquarters are in Athens, while its ocean-going vessels are registered in the Marshall Islands. The young company’s dry-bulk vessels haul such cargoes as iron ore, coal, grain, bauxite, phosphate and fertilizers. Michael Bodouroglou, the company’s founder, chairman and chief executive, has been in the shipping business since 1981 and previously was the co-founder of the Eurocarriers and Allseas lines.
There’s been a bull rush of Greek shipping companies going public, with about a dozen offering public ownership since 2004. They include larger competitors such as DryShips Inc. (Nasdaq: DRYS) and Navlos Maritime Holdings Inc. (NYSE: NM).
Paragon has embarked on a fast-track expansion of its fleet by acquiring secondhand dry-bulk carriers rather than going through the time-consuming and costly process of building new ships. Its Panamax- and Handymax-class dry-bulk fleet has nearly doubled in the six months since its IPO, going to 11 from six, with a current capacity of 706,358 deadweight tons. The company has cut its average fleet age to 6.5 years from 7.8 (versus an industry average of 15 years) with its buildup. However, Paragon has indicated that it also is buying new carriers.
“Charter rates for dry-bulk vessels are near all-time highs, and the outlook is bright going forward,” analyst Kevin Sterling of Stephens Inc. said in initiating coverage of Paragon and competitor Star Bulk Carriers Corp. (Nasdaq: SBLK) with “overweight” ratings in late December. He placed a $25 price target on Paragon.
In reporting its financial results for the quarter ended Sept. 30, its first as a public company, Paragon did post a loss of $14.2 million, or $0.98 per share, because of one-time charges related to a stock conversion for the IPO. Otherwise, it would have had net income of $4.1 million, or earnings of $0.23 a share — which topped the Thomson Financial analysts’ consensus estimate of $0.18 per share. Time-charter revenue totaled $19 million in the quarter.
Paragon is looking out for its shareholders. While reporting its third-quarter results, Paragon announced a healthy dividend program of $0.4375 per share each quarter, or $1.75 annually. In early January, the company announced the adoption of a shareholders’ rights plan, a “poison pill” designed to fend off any unwanted suitors.
“Going forward, the long-term drivers of our market remain unchanged, and Paragon Shipping remains well-positioned through its young, versatile fleet and balanced chartering strategy for future success,” Bodouroglou said in a press release accompanying the most-recent financial results. “We believe that our strong balance sheet with its significant liquidity and low net leverage will enable us to further pursue fleet expansion opportunities, while at the same time continuing to pay dividends to our shareholders.”
Analysts also believe Paragon will make its mark in dry-bulk shipping. “Based on our 2008 estimates, PRGN trades at a substantial discount to its similar-yielding peers on both an EV/EBITDA and P/E basis,” Argus Research analyst Paul Kleinschmidt wrote in initiating coverage of Paragon in late December with a “buy” rating and a $24 target share price. “We believe that the current share price (at the time $16.26) offers an attractive entry point and that the stock also provides investors with a measure of future earnings and dividend security.”
On Jan. 23, Cantor Fitzgerald’s Natasha Boyden reiterated a “buy” rating that was initiated in October, but she trimmed the 12-month price target by $2 to $26.
Sometimes, there’s a fog surrounding IPOs as companies get their bearings and set sail on their intended course. The choppiness of the stock market in general hasn’t helped Paragon Shipping (PRGN) since its public launch, but in the first six months, its stock did not sink. As Stephens analyst Sterling noted, “Over time, we expect Paragon’s valuation to improve as it gains greater visibility with investors.”
