"In Niches There Are Riches"
Summary
TAXI GAAP and "Complex" Accounting Not So Complex.
Medallion Financial Group Makes Reliable and Consistent Subsidiary to TAXI.
TAXI Remaining RIC Not Crucial.
TAXI Practically Left Unfazed by UBER.
Medallion Bank Has Long Track Record of Significant Gain.
Dig into the niches and you will find that there are riches.
It is no secret the impact Uber (PRIVATE: UBER) has had on the taxi medallion industry. The business-blogging world has been running rampant with the news of Ubers' success as if it were some excited junior high schoolgirls who found out so and so's boyfriend made out with another girl- like O M G.
It's so easy to talk about and it's so easy for the news to spread the uneasiness, but take a closer look and you will find that although the value of the taxi medallion has gone down, there is power in the underlying dividend of Medallion Financial Corporation (NASDAQ: "TAXI") which holds a yield of ~12% to date. The fact of the matter is that TAXI has a hidden gem beneath its solid and consistent stance in the stock market which in its subsidiary, Medallion Bank ("The Bank"). The Bank is owned by Medallion Financial Corporation and because they are not permitted to consolidate, outsiders looking in don't see how profitable it is. People like to know where their money is going, so this, combined with the Uber drama, has had tongues wagging. However, drop by the FDIC website and one can see plain and simple that the call reports are available for public information and come to find out, Medallion Bank makes about $25 million a year- after taxes.
Like I said, people like to know where they are putting their money. They also tend to be lazy. I mean, the taxi industry was created so people don't have to walk from point A to B in the first place, correct? I'm saying, there's this thing called the internet… A world wide web of information right at your fingertips, you just need to take the time to put those fingertips to work and do a little research… TAXI's subsidiary, [Medallion Bank] holds a real cash number of $25 million a year with a dividend under $25 million a year. The bank can elect to "dividend up" as much or as little as they want in order to meet future dividend payments, which is most likely the key to their consistency in regard to their making payments right on time for several years to date. To "dividend up" means that the Bank can take its after-tax earnings and pay out a dividend each quarter to the parent company. It is in The Company's best discretion to raise or lower as much as they want in order to fulfill dividend payments. Therefore, they decide how much of the dividend to upstream. This is basic Finance 101, people. In the case that the Company doesn't make as much as it did the year prior, it will just pay out more in dividends to even out…and even if the other part of the Company doesn't make more, they can still upstream by the Bank covering its earnings.
"Medallion Bank..?," you say, "what the hell is Medallion Bank?" Let's dig-or rather, you give me the shovel, sit back, take a load off, and I'll dig a little deeper for you. -No, by all means! I got this.
[Medallion Bank] TAXIs subsidiary is a Utah-based bank that specializes in home improvement loans and consumer lending. Let's say you want to build a house. It's going to cost you a lot of money and you don't really have the money to build but it turns out—congrats! It's your lucky day and because you abided by your parents wishes and got married in a church and not in the middle of a field somewhere, they agree to give you the old "summer home" that you forgot your family even had. Turns out it's a shack though, not the shabby-chic lake house you remember from your childhood. You decide to look on the bright side though and brainstorm with your new wife to turn it into some turn-of-the-century abode of humble matrimony. You want to make it hip but your salary at the new dispensary you work for just can't quite cover the costs… Here's where The Bank comes in. You decide to use Medallion because their loans went from $140 million annual year-end outstanding in 2014 to $210 million annual [y/e] outstanding in 2015. They grew by 50%, so yeah, they must be good. You've never heard of a taxi medallion before but what on earth would that have to do with this bank? Who cares? Exactly. You meet with them and come to find out you join the 10% of the Bank's loans that have a FICO score of over 750. Who knew?! Turns out the guy wants to sell you something he calls "A+ quality paper". You wonder about the name again, repeat it and mull it over, 'Medallion… I like the sound of that.'
But wait. You hear your dad's voice in your head, "happy wife, happy life, son…" and you decide to tell the guy you have to go home and think about it for a minute. You and the wifey decide to do a little research over a bottle of Pouilly Fuisse. Well, this is interesting. The first Google search tells you that the Company apparently has a long and successful track record of having significant gain. In the late 90s, they [Medallion Financial Corporation "The Company"] invested in a company called Radio One, followed by Select Comfort, which was then followed by Medallion Media who did Taxi Top Advertising. You think of a convertible for some reason and have a little chuckle to yourself. In all three cases the Company made five times or more on their investment and aside from those three, they have a publicly-filed list of twenty-five other companies where they have investments and equity kickers. Who woulda thought?
I'm not a psychic (or "therapist", as my colleague calls them) by any means, so there's no telling what the next big gain in their portfolio will be. Let's be pessimistic though and assume the worst. Hey- it's not personal, it's business (s/o to The Godfather). Let's assume there are no gains. In that case the Bank still makes $25m a year.--and if any one of the additional companies in the Company portfolio "pop", for lack of a better word, like one of their predecessors, then that will only further crush the initial thesis of the "unsteady" value of TAXI shares and result in a bigger boost in their earnings. Never mind the portfolio, but there is also the possibility of the Bank itself being next in line…. (More about that in my next article.)
Moving right along… Now, let's talk bonds because everyone likes to talk bonds, am I right? No, not James… but still, bear with me. I'm funny, right? Anyway, TAXI recently issued a 5 year bond at 9%. It's actually pretty difficult to do this. The waters are muddy but somewhere down there is an oyster and in the oyster is a pearl and that pearl is the fact alone that the Company has issued a baby-bond deal in this market is impressive! No company has been able to issue a baby bond recently in the BDC (Business Development Company) risk sector market that is closed. The fact that the Company came to market, got the deal signed, sealed, delivered, and not to mention over-subscribed is nothing but positive. There are some people criticizing this but they choose to remain anonymous.
Ok, but why 9%? Why not raise cheaper capital? Life isn't fair, so don't get used to this but I'm going to be fair and factor the case of TAXI stock having less liquidity into the equation. In this case, the cost is almost irrelevant because whether it's 7%, or 8%, or 9%, every dollar the Company raises could be put to the Bank and leveraged 7 times that at 1% CD rates.
To clarify, every dollar placed inside Medallion Bank can be leveraged at a 7:1 ratio.... ok, one more time… every dollar placed in the Bank allows them to borrow seven times that amount to use for its investments.
With its $25 million bond offering (see above; paying 9%), the math works like this:
$25 million from their bond offering, at 9% interest, costs $2.25 million in interest each year. The Bank can then leverage this $25 million at a ratio of 7:1 (see above), so it can borrow an additional $175 to invest, and the borrowing rate for that money is at 1%, or $1.75 million in interest.
...Thus, the total leveraged amount the Company can invest is $200 million, and it pays $4 million in interest on it, or 2% per year. That is the average cost of capital to the Company.
...So investors receive 9% interest, but the true cost of capital to the Bank is only 2%.
Higher evaluations are not uncommon. If the Bank is making $25m a year, easy, the best case scenario would be that their worth is, say, $500 million and in the worst case $250 million, which is still much more than the total market cap, mind you. If smart investors were to dig a little deeper and do a little more due diligence they will walk away knowing that in fact, the Bank is worth double the market capital today.
But… but… but what? Egan Jones is a company, founded in 1995, that rates the credit worthiness of approximately 2000+ high-yield and high-grade United States corporate debt issuers rated Medallion Financial Corporation an A- and gave Medallion Bank an A+ which to me is worth 5000 anonymous posts where people don't want to put their name on research to back up their theses. If only Egan Jones was a blogger. In the hands of a rating agency that has access to confidential information and posts their ratings of investment grades of companies publicly, Medallion shines.
But wait… I'm still wondering how much of that $25m in earnings came from net interest income….? Alright Finance 101 students, let me enlighten you. In old news, any BDC has equity investments. Any BDC will have gains that will go up and down quarter to quarter. This is real money, people. Cold, hard cash, and real gains; and to say that money isn't palpable [in part] to dividends would mean that you are ignoring a whole part of the Company's investments.
The financial report is public, plain and simple. It reads just like any other annual financial report and it says that the bank earned $25 million in 2014. If you look at the entire report, you'll see on the bank's financial statements that real cash earnings sum to $25 million with NO write-ups or write-downs; paper profits or paper losses do go up and down but just assume that there is zero marking up of anything… There will still be that $25 million earnings in cash from the Bank that will more than cover cash dividends to TAXI stock. The $25 million sidekick. Like Robin to Batman.
Alright, I know this finance talk is so much fun but now we have to move on to something even more exciting: Laws. Not just any laws. RIC (Regulated Investment Company) laws. TAXI is an RIC, which means that it is exempt from corporate taxation as long as it distributes to its shareholders at least 90% of its investment company taxable income. There was an article published recently that referred to TAXIs remaining an RIC as being critical. It didn't elaborate; it just left it at that. This is not necessarily true. The Company went public and TAXI stock was first available in 1996 and it would have been a big problem for [the Company] then to not maintain RIC status because they didn't open the Bank until 2003; but now, because over 90% of earnings come through the Bank already-taxed, it likely doesn't matter whether TAXI remains a RIC or not. In fact, there would likely be many benefits to being non-RIC because it would take away several additional restrictions. Also, let's not forget that because their earnings are taxed at the Bank's level, they get taxed as qualified dividends when the TAXI shareholders get them, as opposed to ordinary tax rates.
The bottom line is that there is no substantial evidence of TAXI being an untrustworthy company, yet alone a company shaking in its boots because of Uber, or any evidence that shareholders should be concerned of TAXI stock [-worth] drastically changing anytime soon. Another little fact: medallions were overvalued [see: inflation], and when Uber came in they actually helped bring the value of the medallion down so that it broke even. Lightbulb moment, am I right?
"In Niches There Are Riches" is the Medallion Financial Corporation company motto. Their intent to find those said "niches" was never hidden from anyone. A niche is defined as "a specialized but profitable corner of the market," or, "a comfortable or suitable position in life or employment," and a niche is exactly what TAXI has found in fitting into Medallion [Financial Corporation]. A comfortable position, indeed. Through the Company's punctual and reliable track record of dividend payments, regardless of how big or little the payments are, they're there. They are in the consumer's pocket at the end of the day. Money is money and the Company has utmost care and concern for its' money, and its' peoples' money. It is frugal and protective over it. Medallion Financial Corporation is doing good business like it always has, and making safe and secure investments and keeping to themselves. The Company has kept its composure through the big industry changes Uber has brought upon it without balking or making any exemplary changes to their way of business. It's a sort of family mentality…ride or die… you-know-they-will-always-have-your-back kind of thing. TAXI has a solid subsidiary that has its back whether Uber or anyone else likes it or not. Medallion is in the batter's box, super-focused and disciplined; it's stepping up to plate and the crowd is on its feet because the people know that this batter doesn't swing at bad pitches. Or rather, they know now…
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