taxiBloomberg recently reported that New York taxi medallions changed hands this October for a record $1 million. There have been a number of reports over the years demonstrating that investment in taxi medallions outperformed stocks, bonds, real estate, and other financial assets. While this may be true, the yield has clearly come way down making investments at the new elevated prices much riskier. Reportedly, a $1M taxi medallion returns $2,500 in profit per month ($30k per year) which amounts to a 3% annual yield. The argument for medallion investment revolves around the regulated supply and recession-proof taxi fare industry dynamics. There is a public company called Medallion Financial Corp (TAXI) which has participated in the bull market. The company offers financing for the purchase of the medallions, has purchased some 300 medallions, and also operates a taxi rooftop advertising business. The stock pays a solid dividend and yields 6.5% which is more than the medallions individually. Without having a viewpoint on the shares of Medallion Financial there are a number of bubble-type characteristics that investors should be wary of in the medallion market.

  • The market is thin and illiquid. Medallion Financial is providing financing to buyers of medallions. The majority of the buyers are taxi industry insiders from Long Island who are using past investments and ownership as equity to finance additional medallion purchases.
  • The majority of the recent returns in the medallion market have come from capital appreciation not income.
  • Information transparency is lacking
  • Buyers may lack financial sophistication
  • Commissions and transaction costs are high
  • The bid-ask spread is wide
  • Medallion investment payback is 33 years at today’s level of profitability
  • Risks to the medallion profit stream may be low in the next couple of years but very high a number of years out:
    • Gasoline inflation could eat at taxi profitability
    • Labor inflation could pressure margins if the job market in NYC improves
    • The industry could be regulated or taxed more
    • Supply of medallions could open up at some point in the future
    • Modern subway in NYC gets build (one of these decades)

Contrast investment in taxi medallions, which yield 3%, to investments in consumer staples such as; Procter & Gamble, Colgate, and Heinz which are regulated by Regulation Fair Disclosure, have best-in-class management teams, are geared towards diversified global growth, are liquid, can be traded with low commissions, have transparent prices on an exchange and also yield 3%. Caution is warranted for those contemplating a $1 million purchase of a taxi medallion.

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