To say that Uber has been disruptive to the taxi industry is quite the understatement. In New York City, some investors are already wondering if the traditional yellow cab may soon vanish from the streets of Manhattan.

 

The threat posed by Uber was not yet fully evidenced when I profiled Medallion Financial Corp. (NASDAQ: TAXI), earlier this year. The company’s namesake business involves financing taxi cab medallions, which are required to operate a taxi cab in many major cities like New York City.

 

Since my profile, the stock has taken a healthy drubbing.

 

Uber, a smart phone-based application that lets users hail a ride in a privately-owned car, has done an impressive job of grabbing the media spotlight. If I had a dollar for every time I heard “Uber” uttered on CNBC or Bloomberg, then I’d have a lot of dollars.

 

This startup is viewed as a classic disruptive business that turns the traditional standing-on-the curb-waving-your-arm-to-hail-a-cab business model on its ear. Lyft is a rival app targeting the same niche.

 

#-ad_banner-#The herd has sold off their Medallion shares in fear of the inevitable death by Uber or Lyft. The lion’s share of TAXI’s financing operations are in New York City, and the price of a medallion in the city has dropped to below $900,000 from 2013 highs of more than $1 million, according to The New York Times.

 

To be sure, Uber isn’t without controversy.

 

New York City’s Taxi and Limousine Commission, which issues taxi medallions, requires Uber drivers to use the same license plates as a limousine, thus restricting Uber to only fares ordered through the app, according to The New York Times. This means that individuals hailing a cab on the street can be picked up solely by traditional cabs.  

 

Also, officials in Chicago and Washington, D.C have questioned the company’s ability to operate as an unlicensed cab company. Globally, similar concerns have been raised by regulators in Spain, Thailand, Germany, Australia and the UK.

 

Although Uber is a classic disruptor, the selloff of TAXI is a product of investor shortsightedness. Uber is a global business, which should not impact the underlying performance of this largely-regional company’s long-term business model.

 

On a macro level, Medallion is lumped into the business development company (BDC) category, which constitutes companies providing financing for mid-market, private companies that are underserved by skittish banks. With access to cheap money from the capital markets, BDC’s enjoy comfortable margins and reward their shareholders with fat dividend yields. They can be great investments.

 

But earlier this year, Standard and Poor’s, Dow Jones Indices and the Russell Indexes decided to remove BDC’s from their broader U.S. equity indexes. They argued that BDC’s are more like mutual funds than the individual stocks. BDC’s are regulated by the Investment Company Act of 1940 and their values are based on their loan and investment portfolios. So, I agree, the new classification is warranted.

 

Nevertheless, dumping large, mid- and small-cap BDC’s across multiple indexes has put an enormous amount of pressure on their stock prices. Medallion is lumped right in there. But, as always, price adjustments create great buying opportunities.

 

TAXI is known for financing taxi cab medallions, but the reality is that that business line only represented 28% the company’s total annual revenue in 2014. There is some concern over declining medallion prices, but the company has a plan.

 

Last year, the TAXI’s total revenue was $36.2 million. This year’s projections call for $40.8 million — a bump of 12.7%.

 

So where is the growth coming from? Medallion has been quietly expanding its business toward big ticket consumer lending, primarily in the boat and recreational vehicle markets. The company’s consumer lending business has grown 70% since 2013 and comprises 63% of total revenues this year, according to research from financial services firm KBW. This makes the Uber argument fairly weak for the long-term outlook of TAXI.

 

Risks To Consider: A big risk facing the Medallion investment thesis is rising interest rates. Higher borrowing costs at the company’s wholesale level will put pressure on margins. The higher rates passed on to customers would price many lower quality borrowers out of the market. Additional risks include a weak economy, which would hurt the purchase of big ticket items such as boats and RV’s.

 

Action To Take –> Despite the Uber-related headwinds, TAXI’s earnings per share likely rose nearly 50% in 2014, to around $1.15. Shares currently trade at around $9.80, which is right about at the company’s tangible book value. Also, the forward price-to-earnings of 9.2 appears cheap, while the 9.1% dividend yield is very appealing.

 

Based on the steadiness of its namesake business (medallion lending) and it’s rapidly growing consumer lending business, the stock is a good buy for investors seeking high current income with possible capital appreciation. With overall improvement in the BDC sector and the dying down of Uber’s hype as catalysts, a 12-to-18 month upside target of $13.70 is attainable. Including the dividend, that would result in a total return in excess of 40%.

 

There’s a lot more to say about the benefits of BDCs in today’s market. That’s why my colleague Nathan Slaughter has put together a special research report called “Everything You Need To Know About BDCs.” In this report, you’ll learn the seven rules that will tell you exactly which BDCs to invest in, and which ones to avoid. You’ll also get access to the names and ticker symbols of every BDC that’s traded on the public market. To learn how to get this report for free, watch this presentation.