The Medallion Financial Corporation (TAXI) is a small niche lending company that makes and services loans to finance the purchase of taxicab medallions in several large cities. Medallion also provides loans to buy boats, motorcycles, trailers and other recreational vehicles. In addition, it originates mezzanine and commercial loans to small companies and has a limited banking activity component.
Medallion has been fairly solid financially since its inception in 1995 and is currently paying out a $0.76 dividend with a yield of 9.70%.
Like many larger companies in this business, it is difficult to get a fundamental handle on the balance sheet but the issue of cash flow generation and the current dividend are two important issues that stand out.
The company’s net available income is $10.8 million (last year it was $15 million). With a dividend of $0.76 and outstanding shares of 17.55 million, the payout is $13 million. There are, of course, other sources of cash such as depreciation and amortization, but the shortfall cannot support the continued dividend payment. The payout ratio, as it currently stands, is about 123%.
It has, like most companies that borrow money to loan, a difficult balance sheet to interpret and it is the technical side of our analysis that is the primary motivator for the trade.
The stock is volatile but the average true range has come in considerably since April of this year. The RSI has broken below the 50 level, the daily and weekly MacD indicators have turned negative and the 21 day moving average is tracking below the 50 day moving average. There is a large wedge pattern that has formed in the last several months and currently we are sitting on a significant support line at around $7.82 or yesterday’s low. If this level is taken out the next area of support is the 200 day moving average at $7.15 and price is likely to get there quickly and proceed lower. The target price projection for a breakdown from this type of technical pattern is to the $6.80 to $6.60 area.
In the wake of the CIT bankruptcy, the outlook for recreational spending, and the prospects for expansion in small business it would be safe to assume that the “TAXI” business model would be under pressure and the likelihood that it can sustain such a high dividend payment in question. These conditions exist as the price appears poised to break an important support level. In our opinion this makes the stock a good short candidate. Traders should note that while volatility has come in, volume on this stock is extremely thin and caution in the form of fewer shares risked and tighter stops will help with capital preservation.
Disclosure: Short TAXI