Sunday, March 29, 2009

Privilege of Cartel Membership:Above-Mkt. Returns

Market Watch -- Medallion Financial Corp. (NASDAQ: TAXI), a specialty finance company with a leading position servicing the taxicab industry announced that earnings, or net increase in net assets resulting from operations was $2,832,000 or $0.16 per diluted common share in the 2008 fourth quarter.

Andrew Murstein, President of Medallion Financial stated, "We are very pleased with the year's results, especially given what has been a challenging environment for financial institutions. Underlying our performance is the collateral value we have in our medallion loans. In over 70 years of involvement in the medallion industry, we have experienced zero losses on any taxi medallion loan we have originated in New York City.

Additionally, taxi medallions are one of the few assets that have appreciated in value in 2008, increasing in every one of our operating markets, and have continued that trend thus far in 2009. Prices in 2008 for corporate medallions in New York City increased over 24% and are currently at all-time highs of $750,000 per medallion in March 2009 (see chart above, data here).

The taxi industry is somewhat insulated in this type of economic environment for several reasons from increased fleet utilization due to the influx of manpower from job losses in other industries, to more people riding taxis as corporations cut back on limos and other car services. In addition, our loan to value ratio on our entire medallion portfolio is now under 50%."

MP: The NYC taxi industry is also insulated very well from competition, since it operates as a cartel with legal restrictions on entry. According to the NYC Taxi and Limousine Commission, the official name of the NYC Taxi Cartel:

In 1937, the number of taxicab medallions was limited to those that existed at that time. By the late 1940s, this number had settled at 11,787. Since 2003, State and local legislation has allowed the Taxi and Limousine Commission (TLC) to sell new medallions, bringing the current total to 13,150 yellow medallion taxicabs operating in New York City. A new medallion is a rare opportunity.

MP: Yes, a rare opportunity to join a cartel with significant barriers to entry. And cartel membership does have its privileges, including above-market rates of return (see chart below). Since January 2004, the price of NYC taxi medallions has increased 2.6 times, while the S&P500 has declined by 28%.


At 3/29/2009 10:22 PM, Anonymous Jim Egnor said...

I figured I'd check out this company's stock price history over the last 10 years. Not exactly stellar but that dividend certainly is tempting (10%+). May need to investigate further.

At 3/30/2009 12:41 AM, Anonymous Anonymous said...

One thing I always wondered about was why whenever the Taxi industry pushed for an increase in fares, the newspapers were flooded with stories about how little a taxi driver makes. Their statements went something like, “we need that 15 percent increase because a typical driver only makes $38,000 per year.” What bothered me was why a medallion that allows you to make so little was worth so much.

At 3/30/2009 12:43 AM, Anonymous Anonymous said...

At $750k, how can you make enough money driving a taxi to earn even T-bill rates of return?

At 3/30/2009 5:17 AM, Blogger The Chinese Capitalist said...

Taxi drivers don't own medallions, at least vast majority don't. Medallion owners "rent" them out to the taxi drivers who then pay a fee for this honor. After fees and expenses like gas/maintenance on the car, there is $38,000 left over for the driver per year.

At current costs, I don't think it is possible for a taxi driver to actually earn a medallion in his lifetime. Remember he still has to pay taxes and eat, even if he could save an incredible $10,000 a year, it would take him 75 years to save enough for his own medallion.

At 3/30/2009 12:50 PM, Blogger ExtremeHobo said...

it would take him 75 years to save enough for his own medallion.

And thats only if they stopped raising prices. 75 years from now they will surely be over $1 mil.

At 3/30/2009 9:23 PM, Anonymous Anonymous said...

I'm a San Francisco Taxi Cab Driver (non-medallion owner) and the annual income of $38K per year is an accurate estimate in our city as well.

At 3/31/2009 4:23 PM, Anonymous Vincent said...

In Dublin, Ireland, quantity restrictions on market entry were lifted and the value of medallions dropped from €100k to zero, overnight.

At 4/01/2009 6:23 PM, Blogger OBloodyHell said...

Give Manhattan back to the Irish!!!

Might make an improvement in the taxi service, eh?


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