Is Paragon Shipping a Buffett Stock?

As the world's third-richest person and most celebrated investor, Warren Buffett attracts a lot of attention. Thousands try to glean what they can from his thinking processes and track his investments.

We can't know for sure whether Buffett is about to buy Paragon Shipping (NYSE: PRGN  ) -- he hasn't specifically mentioned anything about it to me -- but we can discover whether it's the sort of stock that might interest him. Answering that question could also reveal whether it's a stock that should interest us.

In his most recent 10-K, Buffett lays out the qualities he looks for in an investment. In addition to adequate size, proven management, and a reasonable valuation, he demands:

  1. Consistent earnings power.
  2. Good returns on equity with limited or no debt.
  3. Management in place.
  4. Simple, non-techno-mumbo-jumbo businesses.

Does Paragon Shipping meet Buffett's standards?

1. Earnings power
Buffett is famous for betting on a sure thing. For that reason, he likes to see companies with demonstrated earnings stability.

Let's examine Paragon's earnings and free cash flow history.

Source: Capital IQ, a division of Standard & Poor's. Free cash flow is adjusted based on author's calculations.

Paragon has managed to remain profitable on a net-income basis over the past five years, though that's fluctuated somewhat. The massive free cash flow shortfalls were largely due to capital expenditures.

2. Return on equity and debt
Return on equity is a great metric for measuring both management's effectiveness and the strength of a company's competitive advantage or disadvantage -- a classic Buffett consideration. When considering return on equity, it's important to make sure a company doesn't have an enormous debt burden, because that will skew your calculations and make the company look much more efficient than it actually is.

Since competitive strength is a comparison between peers, and various industries have different levels of profitability and require different levels of debt, it helps to use an industry context.

Company

Debt-to-Equity Ratio

Return on Equity (LTM)

Return on Equity (5-Year Average)

Paragon Shipping

62%

4%

9%

Dryships (Nasdaq: DRYS  )

72%

6%

11%

Navios Maritime Partners (NYSE: NMM  )

65%

17%

27%

Diana Shipping (NYSE: DSX  )

32%

12%

19%

Source: Capital IQ, a division of Standard & Poor's.

Paragon has been generating somewhat lower returns on equity than its peers lately, while its debt has been in line with the industry.

3. Management
CEO Michael Bodouroglou has been at the job since he founded the company in 2006.

4. Business
Shipping isn't particularly susceptible to technological disruption.

The Foolish conclusion
Regardless of whether Buffett would ever buy Paragon, we've learned that the company has tenured management, a moderate debt load, and a straightforward industry, though it doesn't particularly exhibit some of the other characteristics of a quintessential Buffett investment: consistent earnings power and high returns on equity.

If you'd like to stay up to speed on the top news and analysis on Paragon Shipping or any other stock, simply add it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks.

Ilan Moscovitz doesn't own shares of any companies mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (11) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 14, 2011, at 7:31 PM, grigory99 wrote:

    It doesn't have a moat.

  • Report this Comment On June 15, 2011, at 1:28 PM, IIcx wrote:

    PRGN recently suspended its dividend adding 10-15 cents/share to free cash flow for the remainder of the year. It's 90%+ chartered for 2011 and has low debt to available cash.

    IMO, its a logical target for M&A

  • Report this Comment On June 15, 2011, at 1:35 PM, IIcx wrote:

    Interesting article relate to PRGN, NM, and DSX:

    http://seekingalpha.com/article/271242-a-useful-metric-for-e...

  • Report this Comment On June 15, 2011, at 2:38 PM, Hohum777 wrote:

    The answer to your question is NO.

    You don't have to look far-- very sneaky, self serving moves by the CEO in the last 6 months.

    CEO being the company founder is a moot point. Maddoff was a company founder too

    Nuff said.

  • Report this Comment On June 16, 2011, at 2:52 PM, IIcx wrote:

    I have to admit, I needed some time to question the title and its potential meaning in the article.

    Warren Buffett is a Bridge player. Realizing the funds need to dump under $2/share is a very nice finesse play to the dummy given PRGN has already posted book.

    ; )

  • Report this Comment On June 21, 2011, at 7:52 PM, imacg5 wrote:

    Seriously.

    Warren Buffett should sue Motley Fool for the continued abuse of his name on utterly ridiculous articles with no basis in fact.

    What would Warren say about a company with: Countless, endless, dilutions?

    A CEO who rewards himself handsomely, for falling revenue, lousy performance, and deals that only help his private management company?

    Motley Fool reminds me of National Enquirer.

    Put out any headline.

    No matter how absurd.

    As long as it entices someone to Click.

  • Report this Comment On June 22, 2011, at 12:59 PM, IIcx wrote:

    imacg5,

    The tone of your comment sounds tainted -- maybe you got burned on the BDI but your top caps pick in terms of performance is DSX and clearly you've done the research which is clearly stated in the PRSN annual report.

    The chairman and chief executive officer is the beneficial owner of all of the issued and outstanding capital stock of Allseas. He also owns 18% of Paragon.

    Allseas is a privately held company.

    Allseas is responsible for the technical and commercial management of PRGN vessels.

    But Paragon has been one of the few to consistently grow Shareholders’ equity from 2006-present, is expanding its fleet in 2011-2012, and has maintained (until recently) a dividend.

    Its a conservative management approach that will ride out the storm and earn the forecasted 1000%+ eps growth in 2013.

    Isn't the point of a buy and hold value and growth and isn't this exactly what Mr. Buffett is so good at forecasting before the market sees it?

    I personally think PRGN will continue to beat estimates and is undervalued by the Street but its my risk and I just bought the stock at multi-year lows -- lows I don't anticipate seeing ever again.

    Also, the founder and CEO has to much skin in the game to throw decades of effort away so I don't buy the conflict of interest spam.

  • Report this Comment On June 22, 2011, at 1:38 PM, imacg5 wrote:

    No, I'm just tired of the same old title used by multiple authors with countless ticker symbols inserted, no matter how absurd the stock is.

    And I've never been burned by the BDI, the reason DSX is my top pick is because I was a devoted dry bulk follower and bought in 2006 and sold when it started to crash. Not the bottom, and not the top, but close enough.

    This could take several posts, but I'll start with Allseas. It's part of the agreement that no matter how often PRGN shareholders get diluted, Allseas will always get free shares to maintain it's 2% holdings in the company.

    http://www.sec.gov/Archives/edgar/data/1401112/0000919574110...

    ii)

    the issuance of 161,602 shares of common stock for no cash consideration to Loretto representing 2% of the maximum remaining common shares which are available to be issued under the CEO Sales Agreement in connection with the Company's obligation to maintain the aggregate number of shares issued to Loretto at 2%.

    And by the way, those outstanding shares are now 68 million, and they weren't used to make accretive acquisitions for PRGN, but rather to pay for the TEU fleet.

    I'll follow up on this with another post.

  • Report this Comment On June 22, 2011, at 1:59 PM, IIcx wrote:

    Thanks imacg5,

    I appreciate the insight.

  • Report this Comment On June 22, 2011, at 4:16 PM, imacg5 wrote:

    I'm glad to have a discussion of dry bulk!

    Aside from a doom and gloom attitude towards the future of dry rates, because of the glut of new ships.

    I also have found the latest moves from PRGN to be not in the best interests of shareholders.

    The spin off of TEU was conducted in such a way as to use PRGN as an ATM machine.

    It was PRGN shareholders who were diluted and paid for the boxships, but PRGN shareholders did not make out well in the transaction. If PRGN shareholders are to be diluted, it should have resulted in an accretive acquisition.

    Instead: The sale of the three container ships resulted in $105 million in cash, 3,437,300 shares of TEU and a paper loss of $14.6 million. They repaid $72 million on the loans for the box ships. The shares of TEU don't add to revenue unless there is a healthy dividend, and if it was all cash they could have used it to buy ships that would add to earnings.

    So now they wait for the newbuilds to arrive. They have on order 4 Handies, due in 2012, with one arriving 4Q this year. 1 Kamsar, and 2 Containers due in late 2013, total cost $242 million, of which $185 million is outstanding.

    PRGN has had falling revenue for two years as the good charters come to an end and are replaced with lousy rates. You take away the revenue from those Box ships and with the following changes to charters, and earnings will continue to drop.

    Between Dec.'09, and March,'10, the daily charter rate on the Coral Seas dropped from $54,000 per day, to $15,775 per day.

    The Calm Seas from $26,000 to $15,775 between Jan.'10, and April,'10.

    Between May 2010 and July 2010, the charter on the Sapphire Seas dropped from $26,000 to $15,775.

    Between April, 2010, and July, 2010 the charter rate on the Diamond Seas dropped from $27,000 per day to $16,250 per day.

    And in Jan. 2011, Korea Lines stopped paying the charter of $37,000 per day on the Pearl Seas. The ship was drydocked, and in late March it was chartered for $18000 per day.

    As far as the rest of the charters that expire this year, if they do get better rates than todays spot rates, it is still going to be a drop from what they are getting now.

    In August the Crystal Seas comes off a charter of $33,000 a day.

    In September the Golden Seas comes off a charter of $43,500 a day.

    In November, the Kind Seas comes off a charter of $45,500 a day.

  • Report this Comment On June 22, 2011, at 5:01 PM, IIcx wrote:

    Thanks imacg5,

    Price/Earnings compared to the Industry for 2011 and 2012 make more sense now.

    The other thing that logically comes to mind in the face of the information is a reverse stock split which makes a falling knife look like child's play for the average investor.

    I was under the impression that the shipping glut only effected the Cape segment of the Dry Bulk market but you're right about the charter rate trends.

    Based on this, I'll switch to a shorter time horizon on the trade.

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