Credit Acceptance Corporation (
) is one of the U.S. companies listed in
Undervalued Predictable Companies Screener
on GuruFocus. From the
latest guru trades
of the third quarter in 2013, we can see Murray Stahl bought it as
a new position, while Joel Greenblatt added more shares to his
portfolio. Steven Cohen, Jim Simons and Chuck Royce also held CACC
in their 09/30/2013 portfolios.
Is this a really company with high-quality business at undervalued
or fair-valued price? Is it really a good investment?
Credit Acceptance Corporation (
), founded in 1972, is one of the world's largest independent used
car dealers in the 1970s and 1980s. Credit Acceptance is an
indirect auto finance company, working with car dealers to enable
them to sell cars to consumers on credit regardless of their credit
history. Its financing programs are offered through a nationwide
network of automobile dealers who benefit from sales of vehicles to
consumers who otherwise could not obtain financing, from repeat and
referral sales generated by these same customers, and from sales to
customers responding to advertisements for their product, but who
actually end up qualifying for traditional financing.
There are few barriers to entry in this industry. That's why Credit
Acceptance Corporation has many factors that are required to be
successful over time. These include a management team that has the
ability to navigate through a variety of economic and competitive
conditions, the ability to accurately forecast loan performance,
the ability to price loans to make acceptable returns and the
development of robust origination and servicing systems and
processes. The company believes that these, as well as other
factors such as high-quality field sales force and the fact that it
offers a comprehensive approach that makes it easier for dealers to
serve this market segment are competitive advantages for the
1. Highly Focused on Core Product
Credit Acceptance Corporation's financial success is a result of
having a unique and valuable product. It offers one product and
focuses 100% of its energy and capital on perfecting this product
and providing it profitably. Its core product has remained
essentially unchanged for 41 years. The company provides auto loans
to consumers regardless of their credit history. It has always
believed that individuals, if given an opportunity to establish or
reestablish a positive credit history, will take advantage of it.
2. CAPS System
Traditional indirect lending is inefficient. Many traditional
lenders take one to four hours to process a loan application, and
they decline most of the applications they process. Credit
Acceptance Corporation develops the CAPS system, which takes 60
seconds, and approves 100% of the applications submitted, 24 hours
a day, seven days a week. In addition, the CAPS system makes Credit
Acceptance's program easier for dealers to use, and allows the
company to deploy much more precise risk-adjusted pricing.
3. Profitable Relationship with Dealers
Credit Acceptance's core business begins with its direct consumers,
or what it calls "dealer-partners." These dealer-partners are the
thousands of used car dealers around the U.S. that enroll in CACC's
program to allow them to finance consumers with lower credit
ratings. One of the most important accomplishments for Credit
Acceptance is learning how to create relationships with dealers who
share the same passion with it for changing lives. Forging a
profitable relationship requires it to select the right dealer,
align incentives, communicate constantly and create processes to
enforce standards. It has also developed a much more complete
program for helping dealers serve this segment of the market. It
believes that continuing to make its program easier for dealers
will likely produce additional benefits in the future.
There are three good signs for CACC. Its financial strength is
strong. It has shown predictable revenue and earnings growth. Its
operating margin is expanding. You can see the detailed 10-year
data charts below.
GuruFocus develops Financial Strength Rank to measure how strong a
company's financial situation is. The maximum rank is 10. We
believe that companies with rank 7 or higher are unlikely to fall
into distressed situations.
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CACC's revenue per share has continued to grow from 3.3 at December
2003 to 23.8 at December 2012, with an average annual growth rate
of 24.6% over the last 10 years. Its operating margin is expanding
from 43.5 in 2003 to 56.3 in 2012. It ranks higher than 89% of 124
companies in the global credit services Industry. Among the same
industry, a company with higher operating margin is more efficient
in its operation. It is more stable during industry slowdown or
recessions. Peter Lynch also prefers those companies with higher
margins than those with lower margins.
Donald A. Foss is the founder and significant shareholder of the
company, in addition to owning and operating companies engaged in
the sale of used vehicles. He has been the chairman of the board of
directors of Credit Acceptance Corporation since March 1992 and
served as its chief executive officer until Jan. 1, 2002.
Brett A. Roberts has worked with CACC since 1991 and was named CEO
in 2002. He has continued Foss' legacy in leading growth for the
company and has further established its dominance in the auto
credit services industry.
Credit Acceptance Corporation has developed a strong management
team. Because the company is successful at retaining its managers,
it becomes stronger each year as it gains experience with its
business. Its senior management team, consisting of 19 individuals,
averages 12 years of experience with the company. While the company
has added talent selectively over the past few years, the
experience of the team is a key advantage.
Credit Acceptance Corporation's management team is quite decent and
effective. Compared with its competitors (NICK, WRLD, TCAP), we can
see CACC has a really high ROE of 35.30% and ROA of 10.30%, both
ranked higher than 90% of the companies in the global credit
services industry. It has the relatively high operating margin of
56.30%, compared with 78% of TCAP, 39.60% of NICK, and 29.40% of
WRLD. It also has the highest 10-year revenue growth rate of
24.60%, 10-year earnings growth rate of 30.10%, five-year revenue
growth rate of 24.90%, and one-year earnings growth rate of 25.50%.
CACC is a fast growing company.
1. Peter Lynch Fair Value & Peter Lynch Chart
Since the company has strong financial strength, high profitability
and consistent growth, we can use Peter Lynch's method to value the
stock. In the top middle part of CACC's summary page, we can see
the Peter Lynch value for CACC is $253.95. Peter Lynch thinks that
the fair P/E value for a growth company equals its growth rate,
that is PEG = 1. The earnings here are trailing twelve month (
) earnings. The growth rate we use is the 5-year EBITDA growth
rate. Then Peter Lynch fair value = PEG * 5-year EBITDA Growth Rate
* Earnings per Share, which we can get for CACC is $253.95. This is
higher than the current stock price.
As of Nov. 25, 2013, the Peter Lynch Chart is showed below:
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From the Peter Lynch chart, we can see for the recent 10 years,
each time the stock price was lower than the price at P/E=15, the
stock price would go up. The stock continuously went up from around
$25 in 2008 to nearly $125 nowadays. Now that the stock price is
still lower than the projected price, from the historical
experience, we might expect that stock price to go up again.
Multiple Valuation: Price to Book Ratio (
) & Price to Earnings Ratio (
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We used the P/B band to get the price range. Over the past 10
years, CACC was traded between 1.1 to 5.2 times. We used the median
PBR (price to book ratio) band value of 3 to calculate the eventual
price. With this method, we got the projected price of CACC at
$90.3. The current stock price is $124.7, which is higher than the
projected price we mentioned earlier.
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Similarly, we used the P/E band to get the price range. Over the
past 10 years, CACC was traded between 5.9 to 40.3 times. We used
the median PER (price to earnings ratio) band value of 13.2 to
calculate the eventual price. With this method, we got the
projected price of CACC at $133.9. If we use the Peter Lynch P/E=15
to calculate the eventual price, the result is $152.4. The current
stock price is $124.7, which is lower than both of the two
projected P/E prices we mentioned earlier.
3. Discounted Cash Flow Intrinsic Value model
The details of how we calculate the intrinsic value based on
Discounted Cash Flow Intrinsic Value (DCF) are described in detail
here. This method smooths out the free cash flow over the past six
to seven years, multiplies the results by a growth multiple, and
adds a portion of total equity. Value = (Growth Multiple) * FCF(6
year avg) + 0.8 * Total Equity(most recent).
Using the Discounted Cash Flow Intrinsic Value model (DCF),
GuruFocus calculates the intrinsic value for CACC, which is $160.54
as of September 2013. The current stock price of CACC is $124.7.
These figures give us a general idea that CACC is more likely to be
undervalued. The stock might have the chance to go up more.
4. DCF Fair Value
[ Enlarge Image ] In the DCF page for CACC, we can calculate the
DCF fair value using DCF Fair Value Calculator developed by
GuruFocus. The recent earnings per share annual data is $9.15. For
a company like CACC we believe for the next 10 years the growth
rate will still be as high as the earnings growth rate for the past
10 years. The past 10-year earnings growth rate is 30.10%, the
five-year growth rate is 37.50%, and the 12-month growth rate is
25.20%. For growth rate higher than 20%, to be more conservative,
we use 20% as the growth rate for the next 10 years. GuruFocus
users can set their own growth rate and see what value they can
get. We assume the years of terminal growth to be 10 and the
terminal growth rate to be 4%. This is because no company can
guarantee to continue to grow at a high growth rate forever. It is
more reasonable to set this growth rate close to inflation rate.
The long-term average return of the stock market is around 11%.
Investors can always passively invest in an index fund and get an
average return. For CACC, I assume the stock performance will be
better than the stock market. In this way, I assume it to be 12%.
GuruFocus users can set their own desired expect return as the
discount rate. Putting all these parameters into the calculator, we
get the CACC's fair value to be $260.48, which gives us the margin
of safety of 52%.
5. Screeners which CACC Can Pass
Credit Acceptance Corporation (
) is one of the U.S. companies listed in Buffett-Munger Screener on
GuruFocus. Buffett-Munger Screener can be used to find companies
with high quality business at undervalued or fair-valued prices:
- Companies that have high Predictability Rank, that is,
companies that can consistently grow their revenue and earnings.
- Companies that have competitive advantages. They can maintain
or even expand profit margin while growing their business.
- Companies that incur little debt while growing their
- Companies that are fair valued or under-valued. We use PEPG
as the indicator. PEPG is the P/E ratio divided by the average
growth rate of EBITDA over the past five years.
We can say under Buffett-Munger Screener, Credit Acceptance
Corporation is a company with "predictable and proven" earnings and
traded at a discount.
CACC is also showed on the list of Undervalued Predictable
Companies - Discount Cash Flow and Discount Earnings Screener.
Under Undervalued Predictable Companies Screener, the intrinsic
value = book value + future earnings at growth stage +terminal
value. The value using the discount cash flow model for CACC is
$333. The value using discount earnings model is $261. Both
indicate CACC is traded at discount.
6. Share Repurchase
Since beginning its share repurchase program in mid-1999, the
company has repurchased approximately 28.1 million shares at a
total cost of $879.4 million. In 2012, it repurchased approximately
1.7 million shares at a total cost of $151.0 million.
The company spent a lot of money on shares repurchase. Why? As
explained in its annual report:
"We have used excess capital to repurchase shares when prices are
at or below our estimate of intrinsic value (which is the
discounted value of future cash flows). As long as the share price
is at or below intrinsic value, we prefer share repurchases to
dividends for several reasons. First, repurchasing shares below
intrinsic value increases the value of the remaining shares.
Second, distributing capital to shareholders through a share
repurchase gives shareholders the option to defer taxes by electing
not to sell any of their holdings. A dividend does not allow
shareholders to defer taxes in this manner. Finally, repurchasing
shares enables shareholders to increase their ownership, receive
cash or do both base on their individual circumstances and view of
the value of a Credit Acceptance share. (They do both if the
proportion of shares they sell is smaller than the ownership stake
they gain through the repurchase.) A dividend does not provide
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From the above share repurchase chart, we can see the long-term
effect of the share repurchase program is very promising. It is
clearly showed that after three years of each quarterly share
repurchase, the stock price went up a lot. This is even true in
recent five years that the stock prices went up a lot within one
year after quarterly share repurchase. The results indicate that
the company did have a large amount of excess capital, which is
good to grow business. The company may believe the current stock
price is below its estimated intrinsic value. And the company is
very good at share repurchases. We might expect the stock price to
go up even more after share repurchases in 2013.
1. The degree of competition in the marketplace tends to be driven
by economic and credit market conditions. The market was very
competitive in the 2003 to 2007 periods while the market has been
much less competitive since early 2008. That's why the revenue
growth and net income growth was relatively slow during 2003 to
2007 compared with the situation after 2008. With interest rates
low and capital widely available, the competition returns to the
market throughout 2011 and 2012. We expect that the competitive
environment will continue to be cyclical in the future and that
competition will increase over the course of the next few years.
When the market is competitive, it is more challenging to grow its
business. The revenue growth rate might slow down.
2. The inability to accurately forecast and estimate the amount and
timing of future collections could have a materially adverse effect
on results of operations. Substantially all of the consumer loans
assigned to the company are made to individuals with impaired or
limited credit histories or higher debt-to-income ratios than are
permitted by traditional lenders. Consumer loans made to these
individuals generally entail a higher risk of delinquency, default
and repossession and higher losses than loans made to consumers
with better credit. Recent economic conditions have made forecasts
regarding the performance of consumer loans more difficult. In the
event that its forecasts are not accurate, its financial position,
liquidity and results of operations could be materially adversely
3. The company may be unable to execute its business strategy due
to current economic conditions. Although its pricing strategy is
intended to maximize the amount of economic profit it generates,
within the confines of capital and infrastructure constraints,
there can be no assurance that this strategy will have its intended
4. The company may be unable to continue to access or renew funding
sources and obtain capital needed to maintain and grow its
business. The availability of additional financing will depend on a
variety of factors such as market conditions, the general
availability of credit, its financial position, its results of
operations and the capacity for additional borrowing under our
existing financing arrangements. If its various financing
alternatives were to become limited or unavailable, it may be
unable to maintain or grow consumer loan volume at the level that
it anticipates and its operations could be materially adversely
5. Its Altman Z-score of 2.10 is in the grey area. This implies
that the company is in some kind of financial stress. If it is
below 1.8, the company may face bankruptcy risk.
6. The current stock price is close to a 10-year high of $127.35.
Its stock P/S ratio of 4.61 is close to five-year high of 5.06.
7. Credit Acceptance Corporation has been issuing new debt. Over
the past three years, it issued USD971.554 million of debt.
I have no current position held at the time of writing. The purpose
of this article is purely research for GuruFocus. This is not a
recommendation to buy or sell any stock at any given time.
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