Nancy Zambell, who edits the Buried Treasure Under $10 newsletter, is now teasing us that she’s found one of the “early winners of the great recovery” — that Greek shipper that can “Double your money — but you must act fast!”
And of course, you simply must subscribe to her newsletter. The newsletter’s very new and it actually gets decent reviews from my subscribers so far, though that’s no guarantee that her teaser picks are always solid gold — she also had the honor of having one of her teaser ads named the “Turkey of the Year” a few weeks ago.
But anyway, I always find it fun to have a look at her over-the-top touting … so today we’re looking for her Greek shipper.
She starts off by implying that she’s just following in Buffett’s footsteps after he agreed to purchase Burlington Northern, though with a far sexier idea:
“Mr. Buffett himself calls his BNI purchase an ‘all-in wager on the economic future of the United States.’
“I love it.
“It’s simple, and it makes sense. As the recovery builds, more goods, materials and purchased products will have to be shipped.BNI, with a near-monopoly on its strongest rail lines, will be a big winner.
“But I’m not buying Burlington-Northern.
“And neither should you, not if you want to double your money fast.
“Instead, using the same investment concept as Buffett, I’m betting on global recovery and I’m buying a Greek shipper that’s just 3 years old.
“It’s a Great Recovery play, like Buffett’s, but with much greater potential for small investors like us… we stand to make better profits than Buffett… faster, too!”
Unmentioned, of course, is that ocean shipping is far less a capacity-constrained business than North American railroads, so you get a lot of risk in exchange for your potential return, but don’t worry — we’re all smart enough to know the difference between a locomotive and a Panamax bulker, right?
So let’s get into some specifics about she particular shipper Zambell likes:
“Under $5 now, but not for long
“This young Greek shipper already has a fleet of 12 huge vessels circling the globe, loaded down with coal, grain, iron ore, fertilizers and all the other commodities that will soon increase in demand as economies worldwide recover.
“Revenues are locked in since the company charters its ships for one- to five-year contracts. Looking forward, the company’s entire fleet capacity—100% of it—is under contract for 2010. Ninety percent is booked for 2011, and 2012 is 45% booked already.
“Morgan Stanley, one of the largest commodities traders in the world, accounts for about 30% of this shipper’s sales. So yes, Wall Street knows about this buried treasure. Yet, as I write, institutional investors own less than 20% of the company’s stock.
“This could change fast. One thing’s for sure.
“This 3-year-old knows what it’s doing, and it sure is moving fast
“In just the past three years, the company has amassed a fleet of 12 huge dry bulk vessels with a capacity of about 765,000 dwt, shipper’s lingo for deadweight tonnage.”
And she’s even so kind as to break out their fleet for us:
“Our 3-year-old owns:
“7 Panamax ships carrying coal and iron ore for energy and steel production, as well as grain and a variety of other dry bulk commodities.
“2 Supramax and 3 Handysize ships carrying iron and steel products, fertilizers, minerals, forest products, ores, bauxite, alumina, cement and other construction materials…
“And the ships are young, too.
“The fleet is about half the age of the industry’s average.”
So who is this little shipping company? Thinkolator sez it must be:
Paragon Shipping (PRGN — click here for an instant trend analysis)
Paragon is indeed about three years old (3-2/3, actually, since I’m continually being told how much those months matter by my children), and they are a Greek dry bulk shipper. Their fleet does match up with Zambell’s tease, both the overall tonnage and the numbers of each class of ship (though they’ve agreed to sell one of those Handymax vessels, so I guess the fleet will soon be 11 ships).
Their fleet is quite modern, as Zambell teases — the Handymax’s were built in 1995, but the rest of the ships are less than ten years old, the company has tried to grow by buying “pre-owned” ships, but not particularly old ones. Unfortunately, the company also came into existence during a wild bull market for dry bulk shipping, when companies like Dry Ships and Diana Shipping were on CNBC every day and seemed to be transporting not iron ore to China, but holds full of cash directly to shareholders pockets. Which means that when they went public and acquired some of those ships, they were worth a lot more than they are today — and several times more than they were worth during the real dark days of the collapse last year. That pressured their debt covenants (the ships were in many cases worth less than the money borrowed to buy them), so Paragon had to do some capital raisings this year by selling equity and selling that vessel (though they apparently will have a loan come due at the sale, so it’s costing them money to sell).
Those capital raisings, along with the very weak market for dry bulk shipping earlier this year and what was almost certainly overbuilding of these vessels during the heyday, help explain why Paragon’s stock fell from $20 to $2, and has fallen back each time it hit got much above the $5 level this year. Similar fates befell essentially all of the dry bulk shippers, whose major business is transporting commodities like coal and ore to China, but what distinguishes among them is the level of debt, the amount of risk-taking they take on their contracts (ie, do they contract their vessels out for spot charters, meaning they hire out one trip at a time at the prevailing rate, or do they use time charters for longer periods — a year, maybe several years — that lock in a steady rate?)
In general, the most volatile shippers are those with more ships committed to spot charters and more debt, the steadier ones are those who do long-term time charters and borrow less — Paragon looks to me like they’re sort of in the middle of the pack compared to the big dry bulk companies. Diana Shipping carries effectively no debt and has been relatively stable over the past year, DryShips is loaded with debt and also expanding into offshore drilling, and was highly exposed to the spot rates when things collapsed last year … Paragon has a fair amount of debt, though equity raisings have helped to even that out, and they are, as Zambell says, being fairly conservative (though most others are now, too, including DRYS) in booking much of their fleet for the next two years. And if you look at a two year chart of DSX, PRGN and DRYS, it shouldn’t be a huge surprise, as a result, that PRGN is more or less in the middle of the channel created by DSX and DRYS.
Shipping companies often trade to a great degree based on their book value, and right now some of them look like a bargain at about half of book value, including both DRYS and PRGN — but be careful, the “book value” is primarily their assessment of the carrying value of the vessels they own, which is often based on the amount they paid for those ships … which is, unfortunately, far more than some of them are currently worth. If you look at them based on earnings, PRGN trades at an estimated forward PE of about 8, DRYS about 6, and Diana about 10 … so again, more or less the middle of the road.
Paragon is far smaller than those two competitors, so it might not be a fair comparison, I just thought it might be useful to note that, compared to others in the same business, they’re not necessarily either a screaming buy or a terrifying risk — my quick glance tells me that, though they carry additional risk because they’re smaller and less diversified (losing one ship will cut earnings, for example), they look relatively middle-of-the-road for a dry bulk shipper, between the larger size and conservatism of Diana Shipping and the family scandal-tinged aggressiveness of DryShips.
Many of the dry bulk companies (and other shippers) also try to pay high dividends, though most of them were cut or suspended when rates (as measured by the Baltic Dry Index) collapsed in the economic downturn. Paragon is currently paying a nickel quarterly dividend which, annualized, would be about 4% if they keep it up at the same rate — that sounds reasonable if you forget the fact that they started out paying a far higher dividend (it was 50 cents per quarter last year) … but they are at least paying something, which distinguishes them from many competitors.
For quite a while these shippers were almost all high-risk, high-income plays, so any dividend hikes or dividend re-starts in the group will probably get a big of attention. If you’re looking for other similar companies to compare, there are quite a few — DRYS and DSX are among the larger ones, and you might also look at Eagle Shipping (EGLE), Excel Maritime (EXM), and Genco Shipping (GNK), all of which are closer in size to Paragon, and which tend to have valuations in the same ballpark based, again, on their aggressiveness and indebtedness.
I’m not a dry bulk shipping expert (on the off chance that isn’t clear from my notes above), and given the huge interest from investors over the last four or five years I expect there are probably several of you who know more about the intricacies and the distinctions among the firms — but it does sound from the cautious statements of these companies over the last couple months like the market is turning up a bit as the nascent recovery blossoms. If you believe in that worldwide economic recovery, and have the stomach for a sector that has been a very volatile play on the global economy, Paragon is one firm that at least gets quite a bit less attention than those I’ve mentioned above — whether that means it will perform any better, of course, is another question. Feel free to share your thoughts with a comment below.
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