This Company Could Benefit From Inflation

Well, at least inflation of a particular kind.

Michael McKee, economics editor for Bloomberg TV and Radio, reported Friday morning via Twitter that New York City taxi medallion prices rose an astounding $216,000 in 2012 to $917,000 and increased at an annual rate of 54.7 percent in the last three months of the year.

For those who do not know, taxi medallions in New York City were introduced in 1937 by Mayor LaGuardia in an effort to reduce the number of taxi cabs to a sustainable level so as to insure that taxi drivers worked manageable hours, kept cabs in good condition and limit congestion of roadways.

When the law was signed, the number of medallions was fixed at 16,900 which was later reduced to 11,787 in 1996. By 2009, there were just over 13,000 medallions in existence.

As the price of these medallions has increased, so has the price of one stock. Medallion Financial Corp TAXI is a specialty finance company that originates and services loans financing purchases of taxicab medallions. The firm also sells ads on the rooftops of cabs.

Medallion Financial shares have rallied almost 20 percent year-to-date as medallion prices have gone up. Currently trading at 32.67 times the past year's earnings, the shares seem rich on a simple valuation. However, looking forward, analysts surveyed by Bloomberg are expecting the company to report EPS of $1.127 for the fiscal year 2013, which would imply a forward EPS of a mere 12.47 times earnings.

Also important, the company has been a solid dividend play for investors. Currently, the stock pays a 6.26 percent dividend having grown the dividend 2.26 percent over the past five years. Looking forward, analysts are expecting the dividend to be maintained at $0.22 per share and for the company to grow the dividend 4.5 percent over the next 3 years.

Technically, the stock is trading at the highest since 2000. The stock looks to have broken through key resistance at $13.68 and then again at $14.00 and should it continue higher, could target $17.05, the 50 percent fibonacci retracement of the all-time price range of the stock.

As medallion prices increase, it will be more expensive for Medallion to purchase new medallions. However, its existing portfolio of medallions also increases and when lease terms end, it can increase rents in the new leases, boosting revenue. Since the supply of medallions is relatively fixed and only increases slightly on an annual basis, rents are effectively stabilized by the government of New York City.