Medallion Financial - Takeover Or Massive Buyback, Equates Opportunity
Summary
- Medallion's industrial bank's earnings power makes for an attractive buy-out at 2.5 to 3 times today's current price.
- Medallion's taxi medallion portfolio risk has given us an attractive value proposition. Thank you short sellers (5.4 million shares short or over 26 percent of the float).
- Management buyout or third-party takeover makes sense; but massive buyback more likely after deal with lenders.
- PE Funds are circling and buying medallions - after they see certain Taxi and Limousine Commission actions and driver trends - creating a base price environment.
- Medallion $10.00 target - we show you how.
Due Diligence
Our analysis of Medallion Financial's (MFIN) performance and the potential actions MFIN can take to improve shareholder value, both as a business and the underlying stock, are based upon publicly available information on MFIN and the industries in which it operates. Our due diligence, beyond reading years of public filings of MFIN, included but was not limited to the following:
We had dozens of discussions with industry professionals in the consumer lending business, medallion lending, and operating businesses as well as owners of New York City medallions.
We conducted several site visits of yellow cab operators to see how busy they were, and to interview owners and cab drivers etc. We met with, and had multiple question and answer sessions in person, telephonically and via email, with the current MFIN management, and their competitors.
We studied industry reports and trends written by medallion industry professionals. We spoke with the former TLC Commissioner, and have had correspondence with the Mayor's office, and the Taxi and Limousine Commission of New York City regarding the taxi industry, handicap accessibility, and ride sharing companies.
All of our due diligence supported a common theme. MFIN is undervalued... by a lot! Please see our sum of the part valuation and continue reading below to see how and why MFIN will get there in 3-12 months.
Overview
Our Long Thesis vs the Short Thesis
Medallion Exposure
"On a Crash Course with Creditors" (see below how this "fear" can and will be eliminated and may lead to a mad rush to buy the stock)
The ability to satisfy short-term debt, especially for a company that has exposure to taxi medallion portfolio risk is a concern, and one that is easily exploitable by fear mongering short reports. However, believe that this risk is overblown, misrepresented and/or misunderstood. Approximately $130 million of MFIN's debt is isolated in subsidiaries and NOT guaranteed by the parent. This accounts for most of Medallion's short-term debt. The debt is guaranteed only by specific taxi medallion loans in an LLC and/or Medallion Funding (a subsidiary and NOT the parent). Yes, MFIN could walk away from this debt if the banks acted irresponsibly and tried to foreclose.
This issue has, and is still, currently unfolding on an $8.8 million loan to a MFIN subsidiary in Chicago. While it may have created a default with other lenders, MFIN already obtained waivers.
$115 million of their debt is not due for over three years (and $73 million of that is not due for over five years). (See page 73 of the recent q here). Unlike other lending institutions that have medallion exposure, like Signature Bank (SBNY), ConnectOne Bancorp (CNOB), and Capital One Financial (COF), Medallion's exposure to medallions must be considered mitigated to the same amount that Medallion has lenders as counter-parties to specific medallion "buckets."
Collateralized Loans are not the Same as Inventory
Taxi medallion prices have declined from $1.4 million in 2014 to approximately $350,000 today (October sales prices were higher, and summer prices were lower). Therefore, a price decline reflecting a change in risk profile of the medallion portfolio was warranted. However, Medallion's Chairman, Alvin Murstein, was nothing if not cautious and tough when it came to his lending documents. All industry people confirmed that Medallion's loan documents are heavy in favor of Medallion, and so are the guarantees on the loans required by Medallion. Many medallion owners that we interviewed have tremendous financial means.
Operators Look at Cash-Flow to Run their Business
Operators of medallions are less sensitive to the "trading price" of their medallions versus the monthly payments they have to make versus what they receive. With interest rates at historic lows, owners can pay more than the market if they get good terms on interest rates and payment schedules. This was the case in the recent resale by Medallion on four of their medallions they took back from a borrower. They were able to sell them well above market to a qualified buyer, as they package the sale with financing.
Drivers Coming back to Yellow Cabs from Uber/Lyft
RECENT TLC decision to demand Uber/Lyft to have handicap accessible vehicles for 25% of their rides is a first step in leveling the playing field with yellow cabs. While there may be more steps by the TLC, this is a BIG one.
Truth about what an Uber Driver Make (an ARTICLE written by personal financial blogger Mr. Money Mustache) ($7.00/hr. yes... he made an average of $7 per hour after gas/expenses).
Click to see the above article
Medallion Bank, Cash Flow Machine that can be Dialed up further for Even More Riches
Medallion Bank, a wholly owned industrial bank subsidiary, that generates over $60 mm in pre-tax profits (before taxi medallion write-downs) is a crown jewel. Despite short sellers questioning the risk of the consumers loans (to RV buyers, motorcycle, home improvement), this bank, and its qualified team, has been through the up and down markets. The original portfolio of loans was purchased from Leucadia in 2003, and the very team that ran the business at Leucadia joined Medallion in the quest to build a consumer lending business.
Bank is the CROWN JEWEL and the Latest Quarter didn't Disappoint
We were happy to see that the bank continues to grow and generate profits on its consumer side. We expect further write-downs ahead for its medallion loan exposure, although we project, as was the seen in this quarter, a slowing pace of write-downs. This earnings power, provides a blanket of safety, as we see medallion's ability to earn their way through any further declines in medallion portfolios.
Understanding the benefits of Owning an Industry Back
This industrial bank is worth at least the $300 million the company has it listed as, we know, we have shown it to potential acquirers. While we are not claiming a deal will get done, or is even in the works, but it is nice to know that people in the industry would be willing to pay the price, and more than we have assigned to this asset. No brick and mortar. Think of Amazon (AMZN) versus brick and mortar retail. No rent, no build out costs, little payroll, and dealers are your salespeople.
Dialing up Deposits
Broker deposits are all based upon matching or beating the competition for deposits (what interest rate are you willing to pay depositors). If Medallion wants another $100 million in deposits, they can just offer major wire houses a fair rate (today's rate is 1.25 percent for over 12 month paper). A weekly report is sent to Medallion Bank with rates that will attract depositors. The shorts attempt to frighten longs regarding deposits becoming "due" is non-sense.
There is a reason that the Consumer Lending is Open and so Profitable
Major banks and lenders have been backing away from the leasing and lending space, and leaving a void in the niche business.
Third Quarter Highlights
The third quarter results (Medallion press release), announced on November 7th, were in line with our expectations. We are encouraged by the performance of the bank's consumer lending both in growth and in income before taxes (income was $17.6 million for the quarter and $57 million for the first three quarters). We were also satisfied with the mezzanine lending division which earned $2.7 million for the quarter, although we had a question on one loan which was not amortizing, we were informed that there is plenty of collateral (and we don't find it material). Charge offs or non-cash reserves for the bank, and Medallion Financial for their medallion portfolios were a combined $12.1 million for the quarter. This was slightly below to in line with our expectations.
Corporate Initiatives
Debt and Buyback
While the company has renewed their share buyback program of $26 million, their failure to buy back shares makes this announcement empty. Understandably, the current lenders to Medallion want to be repaid their loans before the company buys back shares. There are a couple ways to handle a buyback and the lenders.
Medallion Bank can get rated (debt rating) and do a debt or preferred offering at the subsidiary level at fair rates. The bank is well capitalized and doing well (outside of the medallion write-downs, they will consistently generate $60+ mm in profits before taxes).
Post raise, the board can go to the lenders and say they will distribute up to the parent (which they do not have to do, and the lenders cannot force them to do), say $45 mm, keeping $15 mm at the bank (on a $60 mm net deal), thereby increasing the banks abilities to grow further, pay down debt by $19 mm and do a buyback of $26 mm or 30% of the outstanding. Worst case, the lenders say no, and the bank can increase their borrowing base by over $400 million.
Selling non-core assets
We have pressed management for the sale of the racing team (which just hired the first African American driver in decades), and lacrosse team. While management resisted the "timing," we do believe that these assets, although relatively immaterial, will be sold over the next few years.
Negotiating longer terms of Debt
We believe the short thesis would be muted if the debt of MFIN would extend out two or three more years, rather than renewing annually. While $130 mm of debt is only secured by isolated medallion loans, we believe the company could absorb all debt over the next few years with their earning power at the bank, even if the medallions were to lose all value and all personal guarantees became worthless.
A hidden Value
SBICs - the company has three SBICs that have their value, and we are looking to see how best to exploit those.
The mezzanine business, while small ($80 million portfolio), is profitable and its portfolio is easily salable.
Medallion Loans
We remind you that MFIN (with few exceptions) does not own the medallions, but rather lends to the owners of medallions. Therefore, unlike inventory which has no recourse to becoming obsolete, medallion loans should not be discounted to the market price; except when there is a default and the personal guarantee has no substance (please note that Medallion Financial and Medallion Bank, as a policy, requires personal guarantees on their loans). However, MFIN has discounted non-current loans to the market price of $359k. While this price is considerably higher than the low that was paid by Middlegate ($189k plus fees or about $200k) for 47 medallions this past summer, it is in line with actual prices paid in October, and consistent with prices that industry operators are willing to pay (and getting financing at those prices from large banks).
Medallion Values
Nowhere in our thesis, do we anticipate medallion prices rebounding to 2014 prices of $1.4 mm. However, we do not believe that yellow taxis in NYC will go the way of the dinosaur and we see them retaining some value for the next 5-10 years. While the NYC taxi owners and operators failed to anticipate the disruption of Uber and Lyft, there are some recent events that may help them (despite their lack of organization).
Recent Actions
- Licensing requirements
- Traffic (because of all the Lyft and Uber Cars, plus population) has made the traffic so bad that Uber/Lyft are cannibalizing each other and themselves. Drivers find that they spend a great deal of time between rides and therefore do not make much money.
- Drivers are making more money faster with yellow cabs, and drivers are coming back to yellows.
- Fees, transfer, and separate types of medallions have been reduced, waived or changed for the better of the medallion owners.
- TLC requiring WAV announced 12/13 - as reported in CRAIN'S, TLC mandate for Wheelchair-accessible vehicles
Potential Actions which we are attempting to push through the TLC and Mayor's office along with various interested parties.
- WAV (Wheelchair Accessible Vehicles). If this new initiative by the TLC is enforced, it could help level the playing field AND have a big impact on drivers' willingness to driver uber/lyft cars. We see this action as having some traction and validity as expressed in this op-ed in CRAIN'S.
- Congestion fees (according to CURBED, the new MTA president has stated he is in favor of congestion pricing), MTA fees and Access fees currently only paid by yellow cabs may get some action.
- Uber/Lyft employees or independent contractors: While Uber lost this case in London in the last month as REPORTED, we believe there will be some form of hybrid employment category in New York. This may translate into higher costs for Uber and Lyft, which may push their pricing up, thereby helping level the playing field (on price).
- Choice of types of cars for yellow cabs like hybrids, etc., less restrictive.
Uber and Lyft Effect Long Term
We see initiatives by Uber/Google (GOOG)/Lyft etc. as more and more disruptive. We see the end game for Uber/Google/Lyft in the autonomous cars, and taxis. If the medallion owners are smart, they will embrace this and make plans themselves. Adaptation of autonomous vehicles is likely a decade away, and while Medallion will have earned their way, shifted their business mix away or written off medallion exposure long before, we hope the yellow cab operators adapt and that we can still hail a cab.
Breaking down the Value of MFIN
- Medallion Loans: $233.4M
- This is after write-downs of approximately $50M. While the company has personal guarantees and has written down delinquent loans to $411K vs. the est. value of $525K, we would still be conservative and write this number down another 20%. While we could see a significant upside to this (and the banks) loan portfolio, we are less than certain the market is rebounding and therefore we place a $186.72M valuation
- Commercial Loans: $48.8M
- Commercial Loans to Affiliates: $27.9M
- We are electing to discount this to zero
- Cash: $22.1M
- Debt and Other Liabilities (not including deferred tax liabilities of $38.2M): $340.4M
- Medallion Bank: $301.8M Net
- This is after a $100M write-down (separate from the parent's $50M write down of its medallion portfolio) this valuation was done by third party appraisal. Like the Medallion portfolio, we see additional write-downs as prudent in our valuation, but we also see significant upside if and when MFIN partners with, or exploits, FinTech to increase the value of this asset. The bank reports a shareholder equity of $166M. Therefore we are keeping the valuation neutral. And has investment income of $34 million before taxes for the trailing SIX months or $68 mm per year run rate
- Other Investments and assets (est. value): $20.2M
- Net: $239.22M
- Total Shares Outstanding: 24.3M
Per Share Value: $9.84 BEFORE and recovery of the write-downs. We see this stock surpassing $10 in the next 12 months (of less) and possibly going to $15 thereafter.
Lastly
We still have more buying to do.
Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
This article was written by
Analyst’s Disclosure: I am/we are long MFIN. 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.
Our information is limited to being a non-affiliate. Medallion’s financial disclosure is limited in that they do not consolidate their wholly owned subsidiary, Medallion Bank. This reduced disclosure may cause some of our valuations to be off to some degree.
Despite the limited disclosure and information as a non-affiliate, we believe our analysis is solid and believe that our conclusions are elementary and undeniable.
We are long MFIN, and reserve the right to buy additional shares and or sell our shares without issuing an updated report of notice.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
Recommended For You
Comments (15)
... short term trading
pump... really cold here, I wish I was on the beach of U.S. Virgin Islands
In 2001 there were 5,000 Russians living in Cyprus, as of 2011 there were over 100,000.
Rus... mostly live in Larnaca, Limassol and Paphos.
<...
Any of you guys meeting at the Secret Garden the evening the day after MFIN releases the 10-K?
