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About Credit Acceptance

I hate to be a downer right off the bat, but history will tell you that I am not a fan of any sort of auto-related stocks nor am I the biggest fan of companies that are in the lending business (but I don’t despise them nearly as much as I do auto, to be clear), and, what do you know, I recently received a request from a viewer to write about a company that is the perfect intersection of these two evils and let’s just say I love and appreciate my viewers.

Evidently, a lot.

I’m basically a rockstar except instead of traveling around the world, being roared at by fans everywhere, sleeping at one elegant penthouse suite after another, I get to nerd out about stocks and the economy anywhere I want, and today just happens to be at a public library just south of downtown Austin, performing a mean keyboard solo in front of my millions of readers (no, really, it’s been in the millions for a few years now, you guys are awesome) while getting to wear sweatpants and an old t-shirt that most definitely has some food residue near my neckline. 

I’m like Taylor Swift but cooler.

In all seriousness, in the interest of keeping y’all engaged, I’d love to continue writing more on the companies you specifically want me to write about, so please do feel free to continue reaching out because unlike Taylor Swift at a concert, I do take requests.

At any rate, let’s get back focused on a Southfield, Michigan-based auto financing company by the name of Credit Acceptance Corporation, shall we?

The first thing I deem important to mention is the fact that this company isn’t just some general auto financing company, but it specifically drums up business in the cold depths of the subprime auto lending market.

Remember the global financial crisis and economic meltdown that eclipsed circa 2008?

Subprime is still a dirty word, my friends, and don’t you forget it.

While I certainly believe that Credit Acceptance fills a necessary addressable gap in the market, as it is quite literally the reason many that have subpar credit scores are able to finance and eventually purchase vehicles of their own, the company doesn’t have the most pristine reputation, many alleging the firm being a sort loan shark entity within the space, and it’s worth mentioning that this shark is one of the largest within the auto lending ocean, at least within the United States.

Nevertheless, there might be some truth in this, but, really, more risk being assumed on the part of the lender naturally should require more, let’s say, financial insurance from the one taking out the loan, so whether or not Credit Acceptance really does some stuff under the table or engages in some shifty and untoward business practices, the general philosophy and basis of this company’s very existence and the historic success of its business model checks out in a purely objective business sense.

A company such as Credit Acceptance Corporation can justify (that is, to a degree) charging slightly higher than normal interest rates because, hey, the lendee’s credit score says that the minute the loan touches the customer’s hand, there’s a lot (again, historically speaking) risk being assumed, because if you don’t have the best track record of paying your bills in the past, why wouldn’t Credit Acceptance need to have, let’s call it a “deposit” of sorts or a greater potential rate of return on the very loan it issued to the individual with poor credit?

Now, we could dive into the intricacies and pitfalls within the credit and lending sectors of the economy until the cows come home, but my job here is to hone in on today’s company, and higher rates of lending is just going to naturally be part of a subprime lender’s business model, even though those rates can get pretty steep, with one borrower who spoke out against the company reportedly being charged 23% during what has so far been the worst of COVID-19.

Interestingly, this company doesn’t focus on consumers directly, but rather, conjures up business through partnering with auto dealerships across the nation, devising conventional subprime auto deals in which Credit Acceptance fronts a good amount of the cost of a used car at the lot (sometimes the majority of the cost), massively reducing the dealership’s risk while also benefiting the lender in question given that it will begin receiving the stream of loan payments the moment that car is driven off the lot, not only ultimately obtaining the principal, but, of course, the interest for providing such a facility for both the dealer and buyer (or borrower).

Take any of that for what you will, bringing some of my initial perspectives into the picture, Credit Acceptance, by virtue of focusing intensely on the subprime market(s) is subject to a host of risks (primarily rooted in delinquencies, or loan payers, well, not paying), and one of the markets that is most sensitive to even the most mild economic hiccups or slowdowns is the automobile industry, so when the tide turns, the tide can turn for the worst, and rather quickly at that for a company in the middle of the “auto” and “subprime lending” venn diagram.

Developing and enforcing strict lending standards is critical and I presume this company has a good track record of enforcing its standards given just how well its shares (NASDAQ: CACC) have performed over the last handful of years (up nearly 13% over the last year’s span of time), and I also think this is one of those companies that has entered “too big to fail” territory, for better or for worse.

Namely, if the economy were to come near the brink of collapse again like it did in ‘08 (and, of course, the auto economy with it), it is my opinion that the government would deem this company to be just too darn essential for those with low credit in this country (and there are all too many people in this country with low credit scores), inherently providing a service for a financially vulnerable consumer, therefore no matter how poor of a financial condition Credit Acceptance finds itself in as a result of a recession, this is an objective and probable truth of the matter and also frankly a (sub)prime benefit of being an investor in this company.

In other words, it is very challenging for me to imagine a world in which Credit Acceptance doesn’t exist.

This certainly does in no way, shape or form imply that this firm is completely and entirely recession resistant, but it rather adds some sort of rather extraordinary (in the most literal sense) protection, I think, as if too many of their borrowers default on their loans, the government (aka the taxpayer) will more than likely step in and cover the losses and keep Credit Acceptance afloat, at least this is the sort of phenomenon that occurred in ‘08.

Those are some of my initial thoughts on the company and some other facts to match, and now, without further ado, let’s gain some more perspective through Credit Acceptance’s core financial figures in hopes of ultimately putting together an opinion as to whether or not this auto lender’s stock (NASDAQ: CACC) is worth an ownership stake.

Credit’s stock financials

In getting this party started with Credit Acceptance Corporation, I am talking about a $6.36 billion company with an associated share price of $517.42 as well as a price-to-earnings (P/E) ratio of 26.93, all while not currently issuing an annual dividend to its shareholders, which I frankly prefer, no matter how cash flow generative this company may or may not be, as the lending business lends (mild pun) itself some inherent capital reserve risks and I’d much rather have Credit Acceptance hold onto as much cash on hand as it can than drain it in the form of a dividend and get caught with its pants down later.

In terms of briefly analyzing the firm’s present price-to-earnings ratio, Credit’s is a bit on the higher end, trading at a modest premium, at least in comparison with the commonly held fair value benchmark of 20, initially indicating that this company’s stock (NASDAQ: CACC) itself is trading at a premium, however, I deem it close enough to the fair value benchmark in that if there is some sizable annualized revenue growth behind this company, then paying a slight premium for an ownership stake in the company might not be completely inconceivable.

As it relates to the overall condition of the company’s balance sheet, Credit Acceptance has just north of $7.6 billion in terms of assets and $5.8 billion in terms of total liabilities on its books, which makes general sense given the loan-heavy (and thus liability-heavy, to a large degree) nature of its business, and this is one of those situations where so long as the company maintains more assets than liabilities on its books, I’ll sleep fairly well at night, or at least I’ll lose sleep over other things instead.

I also feel the need to briefly mention that the vast majority of the company’s total liabilities are in the form of “Total Long Term Debt,” coming out to $4.1 billion in total, buying this company some time and more breathing room in the long run (and the short run, for that matter) to gradually and comfortably pare down its liabilities.

Onto the company’s income statement, Credit Acceptance’s annual revenues since 2019 have ranged between a little over $1.4 billion (2019) and $1.9 billion, being its latest reported and displayed revenue figure in 2023, which is certainly growth, but this mildly frustrates me because if the company’s P/E ratio were 30 or higher, I would be inclined to say that Credit’s revenues aren’t growing quickly enough to warrant overpaying to that degree, however, in all actuality, I deem the company’s current price-to-earnings ratio as being pretty much in line with its revenue growth over the last handful of years, therefore, I don’t really feel like this adds much to the equation nor the ultimate determination of what this company’s rating should end up being.

Nevertheless, any information is helpful when you’re just gathering the facts and ultimately devising an objective opinion regarding a company’s past, present and prospects, and we will hopefully find some more non-neutral figures in helping us figure this out moving forward.

But hey, revenue growth is growth nonetheless.

Regarding the company’s cash flow statement, Southfield’s finest’s net income and total cash from operations (also measured between and during 2019 and 2023) have remained positive over the years and its total cash from operations specifically experienced a good deal of growth during this timeframe, ranging between $812 million (2019) and $1.2 billion (2022), which makes some sense given that as the economy finds itself in a frothier state, people still need to travel, get around and I know I am a weirdo and keep bringing up my experience(s) as a DoorDasher (yeah, I’m super cool, you can chill), but, with the expansion of the independent contractor economy in this particular arena, you can bet your bottom dollar that this company was probably making, originating and selling more loans for people needing to engage in side hustles in order to make ends meet.

Credit Acceptance is countercyclical in that way, and from a pure business standpoint, this isn’t a bad thing.

Credit’s stock fundamentals

Now, for something that I’ve been especially interested in knowing more about, Credit Acceptance Corporation’s trailing twelve month (TTM) net profit margin and how it compares to the industry’s respective, cumulative average.

According to TD Ameritrade’s platform, Credit’s TTM net profit margin is pegged at 12.83% to the industry’s average of 12.42%, which, to say the least, is very competitive, Credit evidently being well aligned with the average (net) profitability of its peers, which, yet again, isn’t really tipping my scales a whole lot, but I will say that this result is far more desirable than it being lower than the industry’s average, if that even needed to be said.

It also makes sense in that Credit only has a few competitors that go up against it within the context of the subprime auto lending market, some competitors including Santander, Atlanticus, and a few others.

Onto the company’s TTM returns on both assets and investment(s), Credit’s are, once again, eerily similar to those of the industry’s comparable averages, for instance, with the company’s TTM return on assets listed (also as found on TD Ameritrade’s platform) as 3.29% to the industry’s respective average of 2.45%, not to mention its TTM return on investment of 3.44% to the industry’s average of 4.25%, all in all keeping me well, underwhelmed, as this is yet another hint that the subprime auto lending arena is quite concentrated and competitive, and with the company in question’s primary metrics being nearly identical to those of the competition (once again, particularly on the profitability and annualized core return fronts), what more of substance can I really say other than that it is a competitive and seemingly consolidated marketplace that Credit Acceptance operates within?

Should you buy Credit Acceptance stock?

I tend to like companies that have business models that maintain recurring revenues as well as deeply integrated, important services that, if they were to cease to exist tomorrow, would impact far too many people and quite literally change the landscape and longevity of an entire industry in a far more negative than positive way.

Say what you want about Credit Acceptance Corporation, but it most certainly fits all of these criteria.

At the same time, I am not the biggest fan of the auto industry nor the lending space, as these are both heavily cyclical nooks of the economy.

When considering the company’s aforementioned figures, Credit Acceptance’s balance sheet is in a fine state of being, its revenues have been (slowly, steadily and generally) growing each year in recent history, its cash flows the same but at a slightly quicker rate (specifically its total cash from operations) and did I happen to mention its TTM net profit margin and associated core TTM return metrics being pretty much the exact same as the average of its peers?

While I would say there is more good than bad, for me, this case comes down to valuation, and based off of the firm’s present price-to-earnings ratio being just a hint overvalued, I am not willing to pay even a slight premium for a company with good, not great, financials and no strikingly awe inspiring catalysts ahead, at least any that I see at the moment.

Therefore, I’m slapping this company with a “hold” rating.

DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.

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