This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Why Hailing a 'Taxi' Can Be Dangerous on Wall Street

Leave it to the 10-Q to tell the real story of a company's earnings. Consider New York-based Medallion Financial (TAXI), which finances the purchase of taxi medallions by taxi drivers and also runs a business that places advertising on the rooftops of taxicabs (which explains the stock symbol!). Even before the company reported earnings recently, some short-sellers had been predicting (to me, at least) that the company was likely to miss earnings estimates of 33 cents per share.

It did (the actual number was 30 cents) but the surprise wasn't with the bottom line: It was the top line. Interest income (the equivalent of revenue at a finance company) rose 47% year over year and 33% from the prior quarter.

How'd they do that? That's what short-sellers wanted to know, especially because the loan balance was up only 5.5%, and interest rates, while up, weren't up that much. "That's a big discrepancy," says one short. And neither the earnings press release nor the company's post-earnings conference did much to explain the gap. In fact, during the conference call, execs pretty much attributed the increase to income from interest on bad loans that finally were being paid.

The shorts, however, didn't buy it. That was just too big of a leap to come from bad-loan interest.

That's where the 10-Q comes in. Medallion filed its "Q" three days after reporting earnings, and the first thing the shorts noticed, in the "Management's Discussion and Analysis" section, was the mention of something not in earlier financial statements: "Investment income," the company wrote, "contains a component, which is derived from a new loan product collateralized by taxi medallions. In consideration for modifications from the Company's normal taxi lending terms, the Company offers loans at higher loan-to-value ratios and will be entitled to earn additional interest income based upon any increase in the value of the collateral."

Put another way -- in English!: The company booked interest income when the value of the collateral of these newfangled loans rose, but the only way that income can be converted to cash is when the medallion is sold at some point in the future.

In other words, it's noncash income. (Otherwise known as nonincome income.) That was verified by the statement of cash flows from operations, where an analysis showed $2.2 million in something called an "accrued interest receivable." That's where the company accounts for income that has been recognized, but that it hasn't yet received. And in the case of Medallion, it was 10 times higher than the same account a year earlier (which helps explain the out-of-whack income).

Like any receivable, the higher they are or the more they jump, the bigger the red flag. This type of receivable, argues one short, is even worse than high receivable days outstanding found at nonfinance companies, "because DSOs days sales outstanding are often a matter of timing and you know you'll eventually get the money. With this, you don't know if they will ever see the money they're booking as income. What if medallion values rise and then in two months fall? Then you'll have to reverse the income," and that could lead to a charge.

Which is why the shorts consider income from the newfangled loan, and other accrued interest receivables, low-quality income. It's also why they don't believe it should be included as part of earnings calculations. But it's also easy to see why the company included it without mentioning what it was: Strip it out and suddenly, instead of missing earnings by just 3 cents, the company would've missed by 14 cents. That's not good for a finance company, especially one that counts around 70% of its outstanding loans as fixed, while an almost equal amount of its own borrowings are adjustable.

Not a pretty picture, especially when interest rates rise.

Medallion's CFO didn't return my call.

Herb Greenberg writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, though he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at herb@thestreet.com. Greenberg also writes a monthly column for Fortune.

Mark Martinez assisted with the reporting of this column.

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,778.15 +421.28 2.43%
S&P 500 2,061.23 +48.34 2.40%
NASDAQ 4,748.3960 +104.0840 2.24%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs