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Overview

Medallion Financial (NASDAQ:TAXI) is a company that primarily makes loans for the purchase of taxi medallions in various cities in the US. These medallions are required for the operation of taxicabs in many cities in the United States. Medallion Financial has found itself quite an intriguing niche in the financing market, as large banks have not traditionally ventured into this section of the lending market. This type of asset-backed loan requires very specific knowledge and expertise as taxi medallions are not very liquid and require a significant capital outlay. The company is also involved in other types of non-conventional lending such as art lending, which is done by Medallion Fine Art, which lends to collectors with a lien on the art. Currently, the company trades at a rather inexpensive 11.4x TTM earnings. As the Federal Reserve begins to taper its easing program, both short-term and long-term interest rates will likely rise and as Medallion Financial continues to originate loans and recycle capital from matured loans into new lending, the company's interest income will increase which will increase book value and earnings over the long term.

TAXI Chart
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TAXI data by YCharts

Medallion Pricing

Medallion Financial conducts medallion-lending activities in New York, Chicago, Newark and a few other large markets. Medallion pricing can vary dramatically between these locations. New York is currently the largest market for the company's taxi medallion loan portfolio. In 2012, medallion prices in New York reached $1.1 Million. This would be a very significant financial cost for any taxi driver and makes Medallion Financial's financing options quite intriguing. At the end of Q1 this year, the company's taxi medallion portfolio earned a weighted average yield of 4.25%. As interest rates rise in the US, this rate is likely to rise and help boost profits for the company.

Catalysts And Risks

As cities hold auctions for medallions in the future, the company will likely take those opportunities to increase their market share of this niche. In their 2012 Annual Report, the company stated that they expect that New York will conduct an auction of up to 2,000 taxi medallions either this year or next. Additionally, rising interest rates will be a positive catalyst for the company. The stock currently yields 6.3% and if the company raised its dividend payments, new investors could be drawn to the stock. Medallion Financial is currently trading at 11.4x TTM earnings, which is within the valuation range that the company has traded for in the recent past. While further earnings multiple expansion is limited from here, the company is poised to be able to grow earnings rather substantially over the long-term as interest rates rise.

Effective Federal Funds Rate Chart
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Effective Federal Funds Rate data by YCharts

Conclusion

Medallion Financial is well positioned to be able to take advantage of rising interest rates, which will help boost company earnings and ultimately will provide an opportunity for the company to return more cash to shareholders.

Source: Medallion Financial: A 6.3% Yield With Leverage To Higher Interest Rates