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Summary

  • A new survey shows that taxis still dominate Manhattan, the primary market for TAXI's portfolio.
  • TAXI's higher yielding consumer lending arm continues to grow, representing 31% of the company's portfolio at the end of 2013.
  • The company's increasing yield, minimal losses, and low cost funding access are just some of TAXI's strong fundamentals.
  • After falling more than 16% since early June, TAXI is significantly undervalued and an incredible buying opportunity for income oriented investors.

The transportation network company Uber made headlines earlier this year after raising $1.2 billion at a jaw dropping pre-money valuation of $17 billion. In June, Uber dropped its rates for UberX, the company's lowest tier service, in New York and other cities below taxi rates. The announcement further ignited an already contentious debate over the future of the taxi industry in the face of increased competition from ride-share services. Taking the brunt of this concern has been Medallion Financial Corporation (NASDAQ:TAXI). The company is a leader in originating, acquiring, and servicing loans for taxicab medallions in New York, and widely considered the purest market play on the rise of Uber and demise of traditional cabs. TAXI currently holds roughly 20-25% of the New York medallion market which comprises 74% of the company's total portfolio (2013 Annual Report).

Uber does not release any data on its ridership, therefore I chose to piece together some data of my own to get a better sense of the company's position in the New York market and its threat to TAXI. In the article I will provide an overview of my findings utilizing data provided by the NYC Taxi & Limousine Commission and proprietary findings from a survey I conducted with the help of Google Consumer Surveys. While I am an avid Uber NYC user and firmly believe the service is a truly innovative platform, it still has a long, bumpy road ahead before it will overtake the taxi industry. TAXI benefits from a strong portfolio, minimal losses, an increasing yield from growth in its consumer lending arm, access to low cost funding, and a extraordinary 80 year track record.

The NYC Taxi Industry

As a large majority of TAXI's portfolio is concentrated in the NYC market, it is important to understand how this specific market operates. There are currently 13,605 New York taxicab medallion licenses in existence, 6,000 green boro taxi licenses (servicing northern Manhattan and the outer boroughs), and about 40,000 for-hire cars (FHVs), including Uber cars, registered with the NYC Taxi & Limousine Commission (NYC TLC Taxicab 2014 Factbook). There are two types of medallions: individual and corporate. Individual medallions have historically sold at a discount to their counterpart primarily because owners of individual medallions must drive their own taxi for a specific number of hours per year. In October 2011, medallion sales completed their long trek to $1 million, much to no surprise.

Average Annual Medallion Sale Prices (Adjusted for Inflation)

(click to enlarge)

(Source: NYC TLC Taxicab 2014 Factbook)

The principal reason for the rise in Medallion prices is that the issuance of new ones has been tightly controlled by the city while demand has continued to surge. From shortly after New York introduced the medallion system in the late 1930s up until 2004, the number of medallions outstanding remained fixed at 11,787. While the city has not set a date for future auctions, there are still 1,568 medallions left to be auctioned off over the next few years.

New York Yellow taxis provide an average of 485,000 trips per day and nearly all of those originate in a single borough. According to data from the Taxi and Limousine Commission 90.3% of all Taxi Pick-ups occur in the borough of Manhattan.

Borough% of all Taxi Pick-ups
Manhattan

90.3%

Bronx

0.9%

Brooklyn

3.1%

Queens

1.5%

Staten Island

0.8%

Airports

3.5%

(Data from NYC TLC Taxicab 2014 Factbook)

Passenger demographics are heavily characterized by those who are young and possess wealth. Over two thirds of passengers were under the age of 35 and slightly less than half had a household income of $100,000. It should also be noted that one-third of passengers surveyed by the TLC did not own a smartphone, potentially signaling a barrier to using Uber's service, which requires users to download the App or access their mobile site.

(Source: NYC TLC Taxicab 2014 Factbook)

Taking these factors into account, are New Yorkers more likely to use Uber or Taxi to get around Manhattan?

Rider Preference

In a survey of 268 New York residents regarding their preference for getting around Manhattan, 63.4% of those traveling by car used an NYC taxi, 20.9% used Uber, and 15.7% used another for-hire car service. It should be noted that because this survey was of New York residents, the more than 50 million domestic and international tourists visiting the city each year were not included. It may be reasonable to assume that this unsampled group would be more likely to use NYC taxis especially if they come from a part of the world which Uber does not service.

(click to enlarge)

Written by Kenneth Deneau and conducted using Google Consumer Surveys, {July 2014}

Filtered by age, the survey showed that younger riders age 18-34 are three times as likely as older riders aged 35 and older to choose Uber. Additionally, Uber is preferred significantly more by those with wealth with respondents being twice as likely to choose Uber over taxis if they had an income of $75,000 or above. While Medallion Financial Corporation will benefit from continued rider preference for taxis, that is not the only catalyst for future growth.

A Proven Track Record

Founded in 1935 and now operating as an internally managed Business Development Company, Medallion Financial has been in the medallion lending business for three generations. TAXI will lend up to 80% of the Medallion price, though it averages a slightly lower 60-75% LTV (loan-to-value) ratio at origination. TAXI's medallion licensing portfolio is not what most investors would consider diversified, with approximately 74% of the portfolio concentrated in New York, followed by 15% in Chicago.

(click to enlarge)

(Source: Medallion Financial 2013 Annual Report)

For seasoned BDC investors, TAXI's lack of diversification may be a significant concern, especially when placed beside other top names in the sector. Yet one particularly impressive quality of TAXI's medallion lending is its non-existent losses. In the company's public history, it has reported zero losses on its taxi lending portfolio which has an annual growth rate of about 5% over the period. This is in part due to the company's conservative lending policies and its ability to easily repossess the medallion licenses from delinquent borrowers. This low risk is reflected in a weighted average interest rate for the medallion loans of 3.54% as of March 31, 2014. Overall, the company's weighted average interest rate for taxi medallion lending was slightly higher at 3.93% (due to higher interest rates outside of the NYC market).

Increased Consumer Lending Fuels an Increasing Dividend Yield

In search of higher yields and portfolio diversification, Medallion expanded into other areas of lending. The company's consumer loan portfolio has grown at an annual rate of 16% since acquiring it in 2004 and has grown 37% in the past year alone (1Q 2014). While medallion lending may be what the company is known for, consumer lending is becoming an increasingly large part of the company's portfolio.

(click to enlarge)

(Source: Medallion Financial 2013 Annual Report)

Medallion Financial, through its subsidiaries, has a particular focus on marine, RV, and home improvement loans with seasonally high growth skewed toward the spring and summer months. Whereas the company's medallion loans have interest rates around 3.54%, its consumer loans are around 16%. Increased consumer lending has propelled the company's dividend as total distribution per share increased 7% this past year over compared with the previous four quarters. Recent pressure on shares has also helped push Medallion's dividend yield up to around 8.1%. While TAXI shares may remain bogged down in the near term due to continued concerns over the future of the licensed taxi industry, investors will be paid a handsome dividend to wait.

Access to Low Cost Funding

One advantage Medallion has over other BDCs is its access to extremely low cost financing. While Medallion maintains a $150 million credit facility with DZ bank of Germany, the company also boasts alternative low cost funding sources including a bank subsidiary and SBA backed SBIC funding. Medallion Bank, a Utah industrial loan bank provides TAXI with access to FDIC deposits ($7.6 million) and borrowing at the fed funds rate ($25 million). Operating as a C-corp subsidiary unlike its parent, Medallion Bank has the ability to retain earnings and thus is not subject to the constant capital raising many of its BDC peers are. While TAXI refers a portion of its medallion and commercial lending to Medallion Bank, the FDIC restricts the amount of medallion lending the bank can finance to three times tier one capital (a maximum of $390,510,000).

The Bear Case Revisited

The growth of ride-share companies including Uber and Lyft has caused concern over the long term sustainability of Medallion prices. Uber's ability to raise extraordinary amounts of capital signals investors are seeing enormous growth potential in the company. June saw large protests by cabbies around the world calling for more regulation on what they view is an illegal taxi business. It is fair to say that Uber is already having an impact on the taxi industries in many markets. With Uber's rates currently lower than NYC taxis it is reasonable to expect a market shift, especially as more people learn of the service. Combined with the increase in medallion supply expected in the coming months, we could potentially see lower medallion prices. And by all logic what's good for Uber should be bad for TAXI, right? Not necessarily.

New York is a city where the percentage of households without a car stands at 55.7% (the highest in the nation), and at around 77% in its most densely populated borough (US Census Data). Add on more than 50 million tourists who visit the city each year and it's clear that the demand for taxis will remain. Finally, government administrations tightly allied with and in the pocket of taxi interest groups may lead to greater regulation of rideshare services.

The results of my survey show that taxis still rein in New York. I hope to utilize the results of my survey as a baseline for future surveys to track consumer preferences as the supply and awareness of taxi alternatives continues to grow. While Medallion Financial Corporation has been bogged down in recent months, I believe now is a buying opportunity. The company's long history, non-existent losses on taxi loans, access to low cost funding, and increasing yield thanks to continued growth in consumer lending are just a few of the reasons I see upside for this undervalued BDC.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: Survey Shows The Uber Story Is Overblown, TAXI Remains Dominant