You Can't Go Long Uber By Shorting The Taxi Medallion Financial Industry

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Includes: C, MFIN, NYCB, SBNY
by: Larry Meyers

Summary

The value of a taxi medallion is subjective to the owner. He holds it as long as it generates revenue. He does not care about the secondary market.

Rideshare will not materially impact taxi driver revenue. Thus, Medallion Financial's loans will continue to perform.

The short thesis falls apart because taxi driver behavior is not affected under any rideshare scenario.

Shorts will feel the pain when the market realizes it fell for a false narrative, and bids the stock back up to its fair value.

I keep reading media reports, including a recent short-selling thesis by Seeking Alpha contributor James Hickman, that you can go long Uber by shorting the stocks or industry of the Taxi Medallion Financial sector, including names like Signature Bank of New York (NASDAQ:SBNY), New York Community Bank (NYSE:NYCB), Citigroup (NYSE:C), Montauk Credit Union, LOMTO Credit Union, and Medallion Financial (TAXI).

Not only is this inaccurate, in that the Taxi Medallion Financial Industry is isolated from any success rideshare may have, but it sets up shorts for a lot of pain when the inevitable occurs, and the stocks return to their fair value.

The short thesis lacks merit because it tries (and fails) to link the rise of rideshare to a decline in medallion values. You can't go long Uber since it's a private company, but short sellers claim rideshare is going to make medallion taxis "obsolete."

Nothing could be further from the truth. Not to mention, although companies in the Taxi Medallion Financial Industry lend against taxi medallions, those loans only account for 20% of the sector's operating profit.

I'll deal with the false narrative regarding medallion values shortly. However, rather than be distracted, investors should focus on the company's consumer lending, which accounts for 60% of operating profit.

Consumer Lending

Per the 10-Ks of some of the companies in the Taxi Medallion Financial Industry, the consumer loan business consists of about a third of the total company receivables balance, collateralized by ten-year amortized loans on RVs, boats, motorcycles, trailers and home improvements. Loans have a gross yield of about 17%. Backing out the 2% loss rate and expenses, net yield comes to about 14%.

I have been a specialty lender and broker for nine years, and am a national expert in consumer credit. Since the financial crisis, I have seen banks tighten underwriting standards considerably. Consumers considered "prime" still have a hard time obtaining loans.

Thus, people enter the secondary credit market, where there are limited lenders, backed by private equity firms that want capital deployed in the tens of millions, not in the tens of thousands, as these consumers require.

That explains the growth in the Taxi Medallion Financial Industry's consumer portfolio. Of course, the secondary market itself is more expensive. That, plus the dearth of options allows the company to charge interest in the mid-teens for its loans.

Given the massive loan losses we have seen at retailers like Conn's (NASDAQ:CONN), and the 2% loss rate we see at companies in the Taxi Medallion Financial Industry, the industry is clearly underwriting extremely conservatively - just as it always has.

The industry repossesses items in default, and auctions them off. The total principal is rarely written off. Auctions of items like RVs and boats have good residual value.

Facts About Taxi Medallion Loans And the Taxi Medallion Financial Industry

The fundamental principle of taxi medallion value is:

The value of a taxi medallion is subjective to the owner. He holds it as long as it generates revenue. He does not care about the secondary market.

The Short Thesis Has Zero Data To Support It

The short thesis throws every issue against the wall, yet none meaningfully impact the profitability of taxi driving, and therefore are irrelevant.

The short thesis postulates two possible results in regards to driver behavior.

  • That rideshare is such a better deal that taxi drivers will abandon leasing and ownership.
  • That so much new rideshare supply will come online in the form of regular people that taxi profits will be hurt so badly and taxi drivers will abandon leasing and ownership.

In other words, the outcome will be the same...

And I debunked that outcome in my previous article. Case closed.

Still, it is instructive to deconstruct Hickman's rebuttal, to demonstrate that even if rideshare were more profitable, it is irrelevant to the Taxi Medallion Financial Industry because...

The value of a taxi medallion is subjective to the owner. He holds it as long as it generates revenue. He does not care about the secondary market.

Revenue Argument Favors Taxis

How much do taxi drivers earn each year?

In my above-linked article, two fleet owners told me that drivers make $60,000 per year, on average, in NYC. Hickman claims that these fleet owners are biased.

Okay, so let's go to the Taxi & License Commission's 2014 Taxicab Fact Book, which states an average of $22.50 per hour after expenses. On the average shift of 9.5 hours, plus 18% in tips, for a total of $252.22 per shift. At six shifts per week, and fifty weeks per year, the total is $75,667.

But hey, let's be conservative, I'll keep the number at $60,000.

Hickman relies on a much lower salary from Bureau of Labor Statistics. However, BLS does not include self-employed workers, which almost all taxi drivers are. Nor does it account for tips.

Still, the short thesis is based on how competitive rideshare income allegedly is. Except, there is NO firm data on this topic, so making any statement about income unsupportable. Hickman claims salary is "$24.83 per hour" for an UberX driver … except that was for a single driver and did not include costs of leasing and insuring the car (derived from this article by Felix Salmon, paragraph 9).

There's plenty of anecdotal data suggesting UberX drivers don't make very much at all compared to taxi drivers. I provided those links in my original article. Here's a detailed calculation for Uber drivers in Nashville, which comes out to eight bucks an hour.

What about surge pricing? The answer is … who cares? It is irrelevant to taxi drivers because surge pricing occurs when Uber's demand exceeds supply. That means that either yellow taxi cabs are at full utilization, or that they are now less expensive than Uber, and are a better value proposition for consumers, which keeps their occupancy high.

The point is that, despite rideshare, taxi drivers continue to make plenty of money. Medallions hardly face "obsoloence," as is claimed. They aren't, because ...

The value of a taxi medallion is subjective to the owner. He holds it as long as it generates revenue. He does not care about the secondary market.

Cost Argument Irrelevant

The short thesis claims that rideshare has cost advantages ... yet they do not. Hey, you already own the car, so you have the costs anyway!

Not true.

The taxi lease driver in NYC pays an average of $125 for a 12-hour shift, according to the TLC caps (Rules, page 3). He pays for gas. Period.

The rideshare driver pays:

  1. To acquire his vehicle if he does not own one.
  2. If he already owns, he pays ongoing maintenance and repair costs that mount up quickly when driving 50,000 miles per year on poorly-maintained NYC streets. He thus accelerates the costs he would otherwise have AND have to replace the car sooner (see #1).
  3. Vehicle depreciation. Usable life deteriorates more quickly, and destroys residual value the car might have had on the used market.
  4. Gas, like the taxi driver.
  5. Insurance. Yes, he pays insurance anyway. However, he does not purchase commercial insurance. Instead, he must rely on Uber's "contingent coverage" during app-on-no-ride mode, with low limits that won't protect the driver if he seriously injures someone. Even California's recent law that requires coverage during this period for driver has low limits. Even with a million bucks of coverage via Uber when a passenger is in the car, the collision coverage is contingent, leaving the car exposed. Meanwhile, Uber's offshore insurance company has serious deficiencies to consider.

Clearly, rideshare costs exceed those of taxi lessor cost.

For taxi owners, the costs are indeed the same, but with a critical difference. The costs go toward ownership of an appreciating asset. The rideshare driver feeds the black hole of a depreciating asset.

Finally, the medallion driver can meet his costs, and therefore keeps the medallion because ...

The value of a taxi medallion is subjective to the owner. He holds it as long as it generates revenue. He does not care about the secondary market.

Conclusion

Most of the companies in the Taxi Medallion Financial Industry are primarily consumer loan companies, as far as profits go. As far as the medallion portfolio's risk, rideshare's threat is not material.

There is no evidence that rideshare supply will become so great that driver behavior will be affected to the point where lessors move to rideshare (as discussed in my earlier article) or that loans will stop performing.

Taxi lessors make more money, and have fewer costs.

Individual taxi owners have the same costs as rideshare. However, they own an appreciating asset. The rideshare driver is feeding the black hole of a depreciating asset.

The long thesis for the Taxi Medallion Financial Industry remains as robust as it always has been:

  • 60% of the profit comes from consumer loan portfolios, with a 2% loss rate.
  • 20% of the profit comes from medallion loans, with a 0% loss rate.
  • 10% of the profit comes from commercial loans, with a negligible loss rate
  • The industry generates more than enough operating income to pay for its dividends.
  • The industry maintains its conservative LTV ratio for medallion loans of 50%, on average.
  • The industry doesn't care about the secondary market. It only cares about the loans it services, and those loans have zero losses.
  • The stocks in the sector traded one-third higher before negative publicity came out, all based on a false narrative.
  • Conservative value for the industry is 30% upside from here across all the major stocks, and they could go higher in a short squeeze (4-7% of the float on these stocks is short)
  • Rideshare will not materially impact the industry's operations.

Finally, you cannot make a play on Uber by shorting the Taxi Medallion Financial Industry. As the long thesis remains in place, you are setting yourself up for pain when the market realizes the sector has been sold off without any valid reasoning behind it.

The short narrative is a false narrative.

As with any article regarding investments, you should never rely on information you read without doing your own due diligence. My articles contain my honest, forthright and carefully considered personal opinion, and conclusions, containing information derived from my own research. This may include discussions with management. I do not repeat "talking points" but may quote management from an interview. I am never influenced by third parties in arriving at my conclusions. Do not solely rely on my articles or anyone else's when making an investment decision. Always contact your financial advisor before investing in any security.

Disclosure: I am/we are long TAXI.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.