Niche Franchise Breached? Value Trap

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Taxi Medallions have been one of the best performing assets over the past twenty years: http://www.dailyfinance.com/2011/11/16/the-best-investment-on-wall-street-a-new-york-city-taxi-medalli/

However, you as an investor, must require a very high discount rate when you depend upon government licenses.  If Uber makes inroads?http://www.bizjournals.com/sanfrancisco/print-edition/2013/05/17/uber-takes-the-pain-out-of-hailing-a.html?page=2

Then:

taxi ten

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“Value” investors may flock to the seductive yield:  http://seekingalpha.com/article/2246123-medallion-financial-hail-this-high-yield

But csinvesting.org readers know their history when technological change or a catalyst for regulatory change Airline_deregulation upends an incumbent, then the plunging price becomes a value trap versus an opportunity.  Reflexively reaching for this 8% yield by not turn out well.

Of course, the future is uncertain, but after a five year bull run, failure to advance after last quarter’s earnings beat and pricing pressure from UBER, then TAXI’s high valued medallions may become less so.  The government is placing an artificial restriction to keep supply low while boosting prices that hurt consumers’ choices and pocketbook. I wonder how this fight will turn-out?  I will be watching this unfold.

What do YOU think?

4 responses to “Niche Franchise Breached? Value Trap

  1. Its not just uber. They have also introduced those Green cabs for the outer boroughs. There are other examples of taxi medallions going for the equivelant of 2x the average home to less than 10k. That happened in Ireland about 12 years.ago. Its a very very real risk. In that case they just flooded the market with medallions after 30 years of adding none.

  2. There is actually sound economic rationale for regulating the supply of taxis. Normal cars enter the city on their commute, park for the entire day, and exit at night. Taxis enter the city and remain on the street, contributing to traffic for the entire day. Regulation is necessary because the incremental increase in traffic is a cost not paid by the owner of the taxi, but by everyone else on the street. Therefore, unregulated demand alone will lead to a less than optimal supply of taxis due to the cost of these externalities.

    • Agreed! Good point. Sure You could have a tax on taxi income, but allow people the choice rather than government coercion. In other words, UBER allows consumers more choices and more convenience. Thanks for the post.

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