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Medallion Financial: Structure Explained, As Footnote Opens Our Eyes To Hidden Value

May 24, 2018 2:27 PM ETMedallion Financial Corp. (MFIN)10 Comments


  • Hidden value and earnings of $16 million revealed in footnote of recent 10-Q.
  • NAV after write-downs still over 200% of today's trading price with EPV (Earnings power value) suggesting mid teens.
  • Earnings Power Value at the bank's consumer lending and mezzanine businesses point to $2.00 net per share in 2019.
  • A once valid short thesis, now outdated, ignores Medallion's primary business but creates a value entry opportunity.

Medallion Financial (NASDAQ:MFIN) can't seem to do anything right... in the eyes of the short sellers. This bodes well for us value investors, as the price, despite rising over 100% in the last 10 months, remains far below its NAV (Net Asset Value) and its EPV (earnings power value). Below, please find the following:

1) A $16 million footnote explained.

2) Short-sellers tired, and now flawed, arguments exposed.

3) EPV at the bank and mezzanine business point to earnings of $2 per share.

Losses overstated (per GAAP) by $16,188,000 or $0.66 per share

"During the 2018 first quarter, Trust III had a deficit of $22,312,000, as a result of the unrealized depreciation and losses taken on the medallion loans in Trust III. This amount exceeded our maximum exposure to Trust III, which is solely due to a limited guarantee by MFC of $6,124,000, by $16,188,000. Due to technical consolidation accounting rules, we are required to record these losses, even though we are under no obligation to cover them financially. As a result, we are exploring alternative approaches to this investment to allow for a full or partial recovery of these amounts as well as to not incur additional losses in this entity going forward." source MFIN 10Q filed May 15,2018 MFIN 10-Q.

This Trust also houses the DZ loan (the nearly $100 million of MFIN's consolidation debt). As stated above, MFIN has a maximum exposure of $6.124 million. This "exposure" has already been written off along with an additional $16.188 million. So if Medallion does sell off this entity, or as the shorts previously claimed, DZ forecloses, or medallion prices go to ZERO and borrowers default and the Trust is shut down (files bk), MFIN GAINS back the $16.188 million AND the $100 million debt is off of Medallion's books. To be CLEAR, in

This article was written by

Kenneth Orr CEO, CIO and CRO – Series 65 Kenneth “Kenny” Orr is a graduate of Tufts University (’88 - Bachelor of Science) and completed case studies by Harvard Business School Executive Education Program - Concentration in Valuation and Strategic Acquisitions. Kenneth Orr joined a family-owned commodities trading firm called North American Agriculture Inc., and its sister company, Jake’s Products in 1988. Kenny’s roles included sourcing, buying and selling of physical commodities both domestically and internationally. In addition, Kenny led the acquisition of Jackson and Johnson, a leading ICC carrier in the northeastern United States, and sale of significant assets to cooperative Minnesota Corn Processors. During his tenure, which lasted five years, the company’s sales increased by 600 percent and the staff grew to 320 employees. Kenny became a shareholder in both companies. In 1993, Mr. Orr sold his interest in the companies and established his own investment banking firm. Kenny acquired Herold Securities in 1994. Herold was a Connecticut based broker dealer that focused on research. Kenny renamed the firm, First Cambridge Securities, and established offices in New York and Los Angeles, California. As chief executive Officer, Kenny built the firm to over 400 employees and more than 15,000 clients. Clearing through Bear Stearns, FCS quickly became one of Bear Stearns largest correspondents. FCS was an underwriter, syndicate member and or placement agent in billions of dollars’ worth of IPOs, secondary offerings and/or private placements. In addition to brokerage services, FCS maintained a proprietary trading desk, fixed income department and a research department. Co-underwriters and or syndicate members of FCS included Starr Securities, Fagenson & Co., Merrill Lynch, Bear Stearns, Montgomery, and Rausher Pierce. Notable under-writings and or initiated investment focus included, RentWay, which later sold to Rent-A-Center in 2003, and Ivax Corporation, which sold to Teva in 2005, creating the largest generic drug manufacturer in the world. After selling FCS, in 1997, Kenny invested through a venture firm he founded called Triumph. from 1997 through 2015, Triumph invested in micro to small public and private companies that showed promise in the fields of technology, oil and gas, biotech, and health care. Kenny became CEO of KORR Acquisitions Group, Inc. in 2015. KORR is an investment advisory and consulting company. Kenny passed The Uniform Investment Advisor Law Examination, Series 65, in 2015.

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.

KORR and its affiliates are long MFIN and may add or reduce its position without notice. The author, KORR's CIO, Kenny Orr, holds a bachelor of science degree from Tufts University, completed case studies on valuation analysis from Harvard Business School, and studied value investing at Columbia Business School. Mr. Orr holds a series 65 license. KORR currently advises institutional and UHNW investors. Each investor should seek their own professional investment advice.

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.

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Comments (10)

GreatQuarter profile picture
Marblegate ( adviserinfo.sec.gov/... ) bought 46 medallions in a Freidman foreclosure last September: www.businessinsider.co...

Are there other hedge funds involved?
Gordon Gossage profile picture
All readers including MFIN management and stick promoters:

Please link to source for the dollar value of income stream MFIN receives from managing these medallion portfolios

Also please list the names of these hedge funds that own these substantial medallion portfolios

The TLC has the list of all medallion owners

Please identify hedge fund medallion owners on this TLC list by medallion numbers
I note the author did not assign any value to MFIN's vastly expanding new business of managing bulk quantities of medallions for hedge funds and other newbie buyers Advising advisors for a fee...does rent seeking never end?
All auto finance company’s would need to write down all there loans to current car prices for the short argument to be correct about preforming loans Thanks
Thanks, I hadn't read the 10Q yet. Very compelling.
A question, why all these articles by Shorts and Longs on a tiny company like this? What is causing this type of effort when the market cap is dancing around just $125 M? Aren’t there bigger fish to fry? By the way, the long argument sure sounds more compelling to me, lol.
Alan, the reasons there are so many articles on such a small company:
-It is not so small, it's market cap is small because an institution targeted it for a short attack. Now the shares have been beaten down from 2X TNAV to 0.4 TNAV (it was 0.2 TNAV while the short was still manipulating it down).

-MFIN was the preferred target because it had low volume, high dividend (income investors), and BDC status which meant complex accounting and no index fund access.

-As anyone knows, making a thinly traded stock decline is as easy as selling gobs of stock short. Making money is much harder because covering causes the price to rise. That is the situation now with MFIN. The short hedge fund tried to cover but the price went from under $2 to over $5. They have limited ability to fake panic selling, so they double their noise level. They used to target long holders but the weak hands are gone. Now they target uninformed new short investors.

BTW -the company gave up their BDC status -so the next earnings report will be simple. The next step will be inclusion in small cap indexes -so volume will increase, but it will start with a tsunami of buying by index ETFs. The shorts may be screaming for their lives.
Adam Schadt profile picture
Great summary! I’ve been invested in and following this company for several years now. I definitely agree that the complex accounting and reporting structure of prior years is the main reason behind the disconnect between the longs and the shorts. With the rapidly shrinking legacy medallion portfolio no longer representing the threat it once was and the soon to be initiated simpler accounting treatment coming this next quarter, the worst definitely seems behind it.
Gordon Gossage profile picture
DeepResearch707: your response?
What is YOUR response, Gordon Gossage?
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