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Friday, January 10, 2014

Finding a Cab In Some US Cities Can Be Like Trying To Find A Kosher Deli In Saudi Arabia

Finding a Taxi in some US cities can be like trying to find a Kosher Deli in Saudi Arabia

Sometimes investment Ideas come from strange places. For example, the other night I was channel surfing as there was not much on so I was watching an episode of Family Guy. In this episode, "Stewie" was playing homage to the classic 1982 film "Tootsie" starring Dustin Hoffman as an out of work actor who dresses as a woman to find acting work. The specific item that caught my attention was when "Stewie" dressed as a woman is walking down a Manhattan street trying to hail a cab as Dustin Hoffman's character did. Just like the original "Stewie" tries to call the cab as a demure woman but resorts to shouting "TAXI!" in a booming male voice, which does result in a cab stopping. So dear reader you maybe wondering where I am going with this and what does this have to do with investments. Great questions! So this episode got me thinking about a variety of things like how crowded city streets are, which lead me to think of recent articles about demographic shift. You see dear reader part of investing is looking for trends are or will be playing out in the future. One such trend is the desire of the Millennials to live in cities although many will be forced in to the suburbs. Moreover, these same Millennials prefer to be carless and utilize other modes of transport. Knowledge of these factors got me thinking as to what could be a profitable way to participate in the trend.

I started to dig into transportation related issues but was not happy with what I was finding until I started to look outside the box. I am sure dear reader at some point you have traveled to a city or even a large suburban area that had multiple modes of transit. One of the most convenient and omnipresent modes of transport is the Taxi cab. In many areas of the country there are regulatory bodies that issue 'Medallions" for cabs to be authorized to operate in their jurisdiction. For example in the Boston Area where I reside the City of Boston requires a Medallion to operate a cab and currently there are just over 1,800 of them; given the population this makes each medallion very valuable. A Medallion for a New York cab can cost a million dollars which is quite a chunk of change especially for a cabbie and even many cab companies. In fact recently a new NYC record was set for a pair of medallions going for $1.259M each. Taxi commissions control the industries growth by limiting supply allowing demand to drive cost; although their goal is more safety. This control of supply opens the door for a company that is a niche player with experience in the industry giving it somewhat of a moat.

There is a company out there that provides financing to those interested in obtaining the medallion for a cab. The symbol of the company appropriately enough is NASDAQ:TAXI and its Company name is Medallion Financial Corporation. The way the company operates is that TAXI finances the medallion as a secured loan making a vig on the deal clocking in between 6.5 to 7% per loan. Moreover, these loans are very secure with near zero losses on any taxi loans. Additionally, the medallion loan portfolio has grown by 10% year over year since 1996 to almost $700,000,000. The company is adequately funded and has access to credit, in fact they just renewed their $150M credit facility and sold about $45M worth of stock. Moreover, TAXI is trading at 11.9X forward earnings and 1.35X book value which is reasonable. They have thick margins at 72% profit margin and 59.23% operating margins. Taxi is organized as a BDC (Business Development Company) and therefore it is required to pay out 90% of its earnings as dividends which results in a current yield of 6.59%.

TAXI is not sitting still and they are growing their business via their Medallion Bank moving in to the consumer loan area (RVs, Boats etc..), a Venture Capital lending business, Commercial lending, Outdoor advertising and even loans against fine art(note the inflation in collectable prices). So while TAXI is diversifying the biggest part of their business is still the Cab Medallion lending and as such there is a danger here since over 75% of the medallion portfolio is in the NYC market and they expect on the order of 1500 more to be auctioned off in the near future. Chicago expects to auction off 50 Medallions in 2014.

While TAXI saw growth in Medallions in Chicago and elsewhere there is a concentration risk. What happens if Medallion prices fall in NYC? Will a fall kill their business? It could slow their growth but the reality is that lower medallion prices may In fact draw in more medallions to fill the gap in New York even if it means that they make less on each medallion but finance many more of them. Moreover, management sees the need to diversify and they have been doing so at a less than blistering pace but they are doing it in what appears to be a methodical manner showing an extremely low loss ratio.

TAXI currently is trading at just under $14 mostly as a result of their stock offering resulting dilution fears. Moreover, the street hates the stock with 2 analysts calling it a sell, 3 neutral and only 1 outperform in the universe of those that follow the issue. Personally I do not put much faith in "sell side" analyst calls although it does feel more comfortable when they are on your side. I believe the recent sell off in TAXI is overblown and I believe that we can see TAXI work on a new base here at the $13.95 level given that the stock is oversold; while we wait we can collect the 6.59% dividend. In my opinion TAXI is worth a shot at current levels and position size should be no more than 2% of your portfolio. Use a mental stop loss or trade stops with a maximum downside sell at 10% below your entry but preferably only 8% below. Never put your stops in to the market as that is a sure way to get taken out! This will give the shares some room to build the base it needs to resume its rise. Given TAXIs move toward diversification and NYC's continued need to increase its cab supply I think the company is a fair gamble. TAXI!

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