Time to Hail Medallion Financial Shares

Shares of New York City’s Medallion Financial TAXI -2.9874213836477987% Medallion Financial Corp. U.S.: Nasdaq USD6.17 -0.19 -2.9874213836477987% /Date(1442610000467-0500)/ Volume (Delayed 15m) : 316209 P/E Ratio 5.056962544053766 Market Cap 151726469.428329 Dividend Yield 16.207455429497568% Rev. per Employee 309566 More quote details and news » have been run over by deep-pocketed start-up Uber Technologies, now Gotham’s largest taxi operator.

The firm is a leading lender to individuals and companies seeking to own and operate yellow cabs through the purchase of a medallion, which is bestowed by the New York City Taxi and Limousine Commission and allows drivers to pick up passengers who hail them on the street. In all, there are only about 13,000 medallions available, which has at times made them a very secure commodity to lend against. At their peak in 2014, New York City medallions went for $ 1.3 million.

Uber pulled up in 2011, and its influence began to grow with the popularity of smartphones. Its drivers don’t require medallions because the company bills itself as a communications network that isn’t subject to transport regulation.

Uber’s promise of easy hailing of a car via smartphone and the possibility of a lower fare have proved extremely attractive to riders—and devastating to medallion prices. Recently, a medallion was valued at $ 875,000, down about 30% from the peak. Lenders, including Medallion, have backed away from making new loans on them.

Medallion shares (ticker: TAXI) have fared much worse than the medallions, plunging from a recent peak of $ 17.74 in late November 2013 to $ 6.25, or roughly six times estimated earnings, and a mere 60% of book value. The dividend yield hit 15.7%. That might seem dangerously high, but Medallion’s president, Andrew Murstein, insists that the chances of cutting it are “slim to none.”

The selling seems overdone, amplifying Uber’s effect, and obscuring the rest of Medallion’s business. Alex Twerdahl, an analyst with Sandler O’Neill, has a Buy on the shares and a price target of $ 12. “Even with medallion values having declined, earnings haven’t been affected,” he wrote.

Analysts estimate Medallion’s earnings for this year will come in at almost $ 17 million, or $ 1.08 a share, on $ 45 million in sales, compared with $ 16 million, or $ 1.24, on $ 45 million in sales in 2016.

Total yellow-taxi cab ridership has declined, but it hasn’t plummeted. The number of rides slid 8%, to 165 million, in 2014, from a peak of 179 million in 2012, according to data from the TLC. That nicked yellow-cab revenue by just 1.7%, to $ 2.39 billion in 2014 from a peak of $ 2.43 billion in 2013. Indications are that 2015 revenue is flat to down slightly.

“Yellow cabs are simply not going to take the hit that the media would suggest,” says Matthew W. Daus, a partner of Windels Marx, a transportation law firm.

And it doesn’t reflect Medallion Financial’s business. As aggressive lenders, such as Signature Bank SBNY -1.7962350912487426% Signature Bank U.S.: Nasdaq USD136.68 -2.5 -1.7962350912487426% /Date(1442610000068-0500)/ Volume (Delayed 15m) : 780054 AFTER HOURS USD137.27 0.59 0.43166520339479075% Volume (Delayed 15m) : P/E Ratio 20.931087289433385 Market Cap 6876917038.86841 Dividend Yield N/A Rev. per Employee 1036700 More quote details and news » (SBNY) and Capital One Financial COF -3.0702332323099224% Capital One Financial Corp. U.S.: NYSE USD73.56 -2.33 -3.0702332323099224% /Date(1442610323888-0500)/ Volume (Delayed 15m) : 4773239 AFTER HOURS USD73.56 % Volume (Delayed 15m) : P/E Ratio 10.375176304654444 Market Cap 39901077101.0034 Dividend Yield 2.1750951604132682% Rev. per Employee 528391 More quote details and news » (COF), were entering what seemed like a safe, growing market a few years ago, Medallion limited its risk by tightening its credit standards. “We thought medallion prices were getting high, so we lowered our loan-to-value ratios,” says Murstein. Its LTV ratio is 75%, and it hasn’t recorded a loss on any of its medallion loans, all of which carry personal guarantees from the borrower.

Murstein diversified more than a decade ago. Over the objections of some shareholders, he began lending to dry cleaners and laundromats, and bought a firm specializing in high-interest financing. In 2003, he started Medallion Bank in Utah, which makes home-improvement loans, provides credit to recreational-vehicle dealers, and offers some medallion loans. A year later, he bought an RV and marine lender from Leucadia National LUK -0.6366307541625857% Leucadia National Corp. U.S.: NYSE USD20.29 -0.13 -0.6366307541625857% /Date(1442610328401-0500)/ Volume (Delayed 15m) : 6841922 AFTER HOURS USD20.29 % Volume (Delayed 15m) : P/E Ratio 17.72516816633179 Market Cap 7438375141.2381 Dividend Yield 1.232134056185313% Rev. per Employee 932535 More quote details and news » (LUK). “It’s ironic,” says Murstein. “[Some investors] spent all those years objecting to our diversification, and now they wonder why we should remain in the medallion-lending business.”

Consumer loans accounted for 40% of managed loans and 64% of Medallion’s earnings in the second quarter. Cab medallion loans, about 70% of them made in New York, remain a significant line of business at 51% of managed loans, but account for just 19% of interest income. The loss rate on Medallion’s total portfolio is 1%. Overall, revenue is up about 20%, to $ 22.7 million, in the first six months of 2015 from the level a year ago.

“People have certainly overestimated the trouble Medallion is in,” says Sam Stewart, chairman of Salt Lake City’s Wasatch Advisors, and manager of its Strategic Income fund (WASIX), which has been buying the stock. “This Uber thing is overdone. Uber isn’t going to drive taxis out of business. It’s both—not either/or.”

Murstein also has raised the stock-buyback authorization to $ 26 million, to counter a large short position of 3.3 million shares, or 15% of the float. A report by Twerdahl says, “As the company continues to pay its dividend and buy back shares, the short interest will squeeze out.”

Uber, backed by the likes of Amazon.com founder Jeff Bezos, has some problems. Its drivers’ status as contractors, rather than employees, has been challenged in court, and questions have arisen about their insurance and qualifications.

New York’s cabs have faced all kinds of rivals—from limousines, to green cabs with limited travel parameters, to rogue drivers. Uber will take its share of the livery market, but is unlikely to wipe them out.

In part, that’s due to the pluck of immigrants like Abwabul Chowdhury, 48, who came to New York from Bangladesh in 1985. He and a friend bought a medallion and paid down their loan by driving their cab nearly 24 hours a day. Chowdhury estimates Uber’s arrival is forcing him to work 20% harder to make the same money as before. “The World Trade towers came down, but look, the Freedom Tower rose in its place. I’m sticking with a yellow cab. It’s going to be there, come what may,” he says.

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