When you have ridden in a taxi cab, have you ever thought of the business metrics behind the business of being a cab driver?  I have.  Medallion Financial Corp. (NASDAQ:TAXI) is the business that many drivers and business owners turn to in making this possible as far as being an owner.  Medallion is a company I have been fascinated with for quite some time, and developments over the last few months brought me to look further into the company.  What is more interesting here besides its niche is that the company may be one of the more misunderstood specialty finance operations out there.  It also may have much less credit risk exposure than some would assume compared to many specialty lenders.  Depending on how conservative or liberal you are in accounting and valuations, there are some aspects of the underlying business that might not be fully reflected on the balance sheet.

Brian O’Leary, Chief Operating Officer spent more than an hour with me personally along with the company’s PR firm Zlokower Company at the Medallion Financial headquarters in New York City on Friday, January 11, 2008.  This was an exclusive interview with 24/7 Wall St., LLC Larry Hall, Medallion’s Chief Financial Officer, who was in the middle of preparing the year-end statements, also joined the meeting briefly.

To show how different the perceptions were versus reality, the note that they had been thought of as a lender to taxi and dry cleaning owners really came to mind.  In fact, forget the dry cleaning business as it is history and was not a real push.  The full MEDALLION does in fact make loans for taxi medallions.  But it also has more to the story:

• It owns a Utah bank that is off the books other than a line-item that was de-consolidated and was therefore not deemed as a financial restatement, and has an asset based lending operation for receivables and inventory;
• It has a small mezzanine lending operation;
• and it has a percentage of a pending SPAC IPO that is a potential back-door play that some investors might think of as an embedded call option in an entertainment business (see below, because that is my perception rather than a promise from the company);
• Because it operates in different aspects of finance, Medallion ( or unit) is registered and governed as a Small Business Investment Company, a bank, and as a registered investment company.   

MEDALLION’S CORE OPERATIONS

Medallion’s mainstay is lending for licensed taxi medallions in markets that are established, regulated, and where they are not the only finance shop in town.  Its predominant area is in and around New York City and Newark, and its two largest markets behind that are Boston and Chicago, with other cities as well.  Medallion wants to operate in more cities if the regulations and governance of the markets come into place, and these new markets may essentially be a small long-term call option for shareholders.

Interestingly enough, after the business was explained to me there may even be a small degree of counter-cyclical business aspects in an economic downturn as qualified candidates from other fields end up becoming taxi drivers.  Mr. O’Leary told me, "A Yellow Cab isn’t a luxury. The black cars (private cabs usually black Lincolns) and private limos for hire are a luxury."  The pricing of taxi medallions has been greatly in its favor and the company actually prefers regulated markets where there is at least some other competition.  Because of the underlying value of the medallions being stable and having risen through time, it is proud to say that in the main operations its loan losses are close to nil.

New York is the crown jewel of the business as medallions there run around $600,000 each with the minimum of two for a business owner to buy new taxi medallions.  There are some plans currently in New York that may or may not drive the value higher, although this should not be an assumption in deriving values.  There are somewhat cheaper medallions ($400,000+) but these are also unattainable for most of the population seeking to acquire them without financing.  Medallions in other cities are far cheaper so those markets are markets where I would consider them individually as more of a niche rather than dominant part of the company.

SO WHAT ARE THE OTHER ASPECTS OF THE BUSINESS?

The commercial and consumer lending operations inside Medallion Bank are largely to small tow RV and marine loans; but so far this has held up much better than it originally budgeted for according to Mr. O’Leary.  The lending rates on these often tend to be 18% or 19%.  It is my understanding that Medallion budgeted for 5% loan losses there, yet these have been running in the low 3% range and toward the end of last year were approaching 4%.  This is carried on the books as roughly a $50.5 million line item investment on the books as of September 30, 2007.  In a normal financial company environment I could make the argument that this unit may be worth more than it is listed as, although the caveats for consumer finance today are prevailing over many of the facts of today because of the current financial sector woes.

When I asked if there were any major restructuring or significant business changes planned on the immediate horizon Mr. O’Leary answered, "No, but we are always looking for the next great niche." As the company is always on the look for new growth avenues, their mantra of "In Niches There Are Riches" stands out in mind.  When you consider that this Medallion may be one of the more misunderstood finance companies out there the mantra stands out even more.  Andrew Murstein is one of the drivers in the company’s efforts to seek new niches.  This may take months or years to occur, so consider this another potential long-term call option for Medallion shareholders.

The mezzanine financing operation is a small part of the business where the goal is to have a bunch of small hits and an occasional home run.  This aspect of the business benefits from equity kickers or warrants or other financial participation.  This is also a non-core aspect of the business, but it has made large occasional contributions before.

The company is also more than satisfied with its current capital structure:

• It completed a small $35 million financing last year that it felt was cheap money, and it recently got to buy back roughly $2 million of this amount.
• Its credit lines are adequate and were recently raised from $125 million to $250 million at Citi and has another $325 million in credit lines that it can access from Merrill Lynch.
• It has an active shelf filing that will allow Medallion to raise cash if it finds a next great niche.
• The company believes it has no real ties to the current debt crisis or liquidity crisis that has been affecting most of the large financial institutions over recent months.

The SPAC, or special purpose acquisition company, is called Sports Properties Acquisition Corp. (will trade as HMR on AMEX) that is a minority investment held by Medallion; and the predetermined value (of the entity, not Medallion’s portion) is roughly $200 million according to the SPAC IPO FILING SUMMARY.  This SPAC has baseball great Hank Aaron, former New York Governor Mario Cuomo, Jack Kemp, and others on its board of directors.  It is led by Tony Taveres as President & CEO of "HMR" and he is former president & CEO of SMG, a premier management company engaged in the private management of stadiums, arenas, theaters and convention facilities.  Medallion maintains the stance that no business has been identified, but if you’d like my bet I would bet that the SPAC will seek to either acquire a professional sports team or a venue for sports.  That is my own belief.  But if this occurs, this could be thought of essentially as a significant long-term multi-year call option that might generate significant returns for the company.  Medallion is a back door play into this if it has a successful IPO.

THE BUSINESS INTERNALS

Medallion does not offer formal financial guidance, and as of now itappears that the earnings will be released in first week of March.  Iwas not given any wink-wink nod-nod, nor was I able to spot any classic"tells" in body language that gave any hint as to a great quarter norany classic "tells" that would lead me to believe the quarter wastroubled.  As this company is still relatively small in the grandscheme of things and as it is quite under-followed on Wall Street, Icannot give you any direct or finite insight into the company’searnings targets or how it will perform on a quarter to quarter basis.But as far as this company’s operating history is concerned and as faras its ability to manage the business, I was pleasantly surprised at how open the company was.   

There is also a solid succession plan in place at Medallion.  AlvinMurstein is the Chairman & CEO and he is in his early 70’s.  Hisson is Andrew Murstein, and he is president of the company and is alsothe one that is in charge of looking for more avenues the company canuse for its next great niche. In fact, I believe that this will markthe tenth year that Andrew Murstein has been there as an officer.   Itcertainly doesn’t seem like one of the situations where there is asuccession plan challenged by an heir who doesn’t understand thenuances of the business.  Both Mursteins are listed as founders andAlvin Murstein has more than 40 years experience as an executive in thetaxi industry. 

The Mursteins are also significant shareholders, and other large holders areRiver Road Asset management, Dimensional Fund Advisors, NorthPointeCapital, Whitebox Advisors, Barclays, and many more.  Its board of directors has Mario Cuomo, Hank Aaron, and others on it.  With a $9.93price on January 16 the implied market capitalization rate is just over$173 Million.  Unless there are significant changes between now and thenext filing date, this is barely above what we would consider as thevalue of the listed net tangible assets of the company.  Medallion alsodoesn’t list any large percentages of its books as Goodwill and otherintangibles, and that’s a good thing as far as 24/7 Wall St. isconcerned.  If the current dividend is maintained at $0.19 in thisenvironment, then the dividend yield is over 7%.  There are also stockoptions in Medallion, so investors can at least partially hedge theirpositions if they choose to.  It also had as of the end of December ashort interest of 278,887 shares; and based on an average daily volumeof 39,900 it has a days to cover ratio of roughly 8 days.

As the company has thin analyst coverage, we cannot make any quarterlypinpoints as to how Wall Street will value Medallion on any given day.There are risks in smaller public company businesses and the currentenvironment for anything tied to lending right now has been hit withextra scrutiny by Wall Street and Main Street alike.  Its 52-weektrading range is $9.65 to $12.48, and over the last five-plus years(before dividends) this has traded as low as $3.04 (August 2002) and ashigh as $13.85 (May 2006).

Had I not had any scheduling conflicts earlier in the week while I wasin New York, I would have been able to meet with the Mursteins aswell.  But that is was due to my own schedule and no fault of theirs.In fact, the company and its public relations firm Zlokower Companyhave been more accommodating in making information available and inoffering availability of management to explain their company.

Jon C. Ogg
January 16, 2008

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DISCLAIMER: I own no shares of Medallion and received no directcompensation nor any indirect compensation of any sort for interviewingor covering this company. -Jon Ogg

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