Medallion Financial: Good Defensive Play

Apr.30.07 | About: Medallion Financial (MFIN)

I recently posted about the historically favorable April seasonality in pre-election years. There is still one day left in April, but this year will most likely improve the April record. For the first two weeks in April (through April 13), the S&P 500 was +2.25%, while the month-to-date return so far is an impressive +5.15%. But it may be time to take some money "off the table" since May has historically been a poor month in pre-election years with basically a flat return since 1950.

But taking money "off the table" doesn't necessarily mean you have to be in cash. I often look for other investments that are somewhat un-correlated to the S&P 500. For example, high yield bond funds were a great place to be in the year 2002. But right now, high yield does not look very attractive because of historically low credit spreads.

But another investment I like now is Medallion Financial Group (TAXI). They are a specialty finance company that has long been a leader in taxi medallion lending and has been broadening their business by opening a bank and making asset-backed commercial loans. The company owns a large portfolio of taxi medallions worth over $500 million.

Taxi medallions have been a great long term investment and have gone up around 13% a year since they were first issued in 1937. TAXI operates by borrowing money and then lending to people who buy taxi medallions. Its net interest margin is currently around 3.10%, but that can easily widen when the yield curve becomes less flat.

Here are a quick overview of why I like TAXI-

1) I believe TAXI will benefit from the weakness in the real estate and sub-prime mortgage finance industries. Workers are being laid off in those industries- many of them are contractors or independents do not like the usual corporate jobs, and may find driving a taxi cab an attractive alternative now. This demand should help taxi medallion prices and TAXI's medallion lending business.

2) TAXI pays an attractive dividend yield of 6.30%. Credit quality is very good. Unlike high yield bonds, TAXI is hedged well against inflation because of their large portfolio of medallions.

3) TAXI currently sells at a price/book ratio of 1.25 which is in line with other "business development" companies. But its bank and consumer businesses have been growing steadily and its return on equity should increase from the current 7.80%. TAXI may soon be treated more like a specialty consumer finance company or commercial lender which sell at higher valuations closer to two times book value.

Full Disclosure: I am long TAXI.

TAXI 1-yr chart: