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Analyzing Credit Acceptance Corp



analyzing cacc - credit acceptance corp

In this article, Mr. Berko analyzes the stock value of CACC.


Analyzing Credit Acceptance Corp

Dear Mr. Berko:

My elder sister, who never married and who worked for a large automobile dealer in Detroit, passed away last year, and her estate was finally settled. My remaining sister and I were the sole inheritors of a huge portfolio of 16 stocks, valued at $732,000. All the stocks are well-known blue chips except for 300 shares of Credit Acceptance Corp. We intend to keep all the blue chip stocks because they pay good dividends and because we're familiar with their names — Southern Co., AT&T, Boeing, Eli Lilly, Verizon, Pfizer, etc. But we've never heard of Credit Acceptance, which doesn't pay a dividend, and we would like your opinion. Should we sell it or hold? — GT, Wilmington, N.C.

Dear GT:

Most of us have seen those huge, bold signs at hole-in-the-wall auto dealers proclaiming, “NO ONE TURNED DOWN” or “WE ARE THE KING OF CREDIT” or “WE APPROVE EVERYONE!”

This is the slimy subprime car loan business — which today exceeds $100 billion, and many of those billions are shaky loans.

Credit Acceptance Corp. (CACC-$282) has lending contracts with thousands of grubby dealers who run grimy used car lots from offices in grungy shacks and trailers. Their only pieces of office equipment are a smartphone, a pocket calculator, several ballpoint pens and a fax machine/printer attached to a computer. And even prominent dealers resort to CACC when payday lenders, online loan stores, drug dealers, pawnbrokers and loan sharks from the Islamic State group and the Mafia turn down a credit application. Without lenders such as CACC, the auto industry would be in deep, deep doo-doo!

CACC, founded in 1972 and home-ported in Southfield, Michigan, makes auto loans to very risky buyers, including those whose credit scores are so bad that they're radioactive. Many of CACC's loans are so risky that management figures that slightly over 30 percent of them won't be collectable in any given year. So, with rates as high as 24 percent, plus add-ons, penalties, fees and miscellaneous charges, it's little wonder that most of CACC's loans begin to sour in 90 days. And as those loans turn sour, numerous complaints to the Better Business Bureau about CACC's rude and inappropriate collection practices begin to become legend.

CACC's net interest income has increased in each of the past 10 years, growing from $190 million in 2007 to an expected $777 million this year. Other revenues — from a smorgasbord of onerous fees, add-ons and sneaky tariffs — will increase CACC's income in 2017 by an extra $100 million. And CACC is an enormous profit monster. During the past decade, earnings have increased annually, from $2.20 a share in 2007 to $16.31 a share last year, and Wall Street expects $18.30 this year. Though those are impressive numbers, please note that management, in 45 years of operations, has refused to pay a dividend to shareholders. However, a $10,000 investment in CACC 10 years ago would be worth $104,000 today.

CACC trades at a low price-earnings ratio of 17-to-1 and has a market cap of $5.5 billion. And CACC's net margins of 43.5 percent, 31.5 percent return on equity and cash flow of 60 percent of revenues put its peer group to shame. Standard & Poor's has a “strong buy” recommendation on CACC, and among CACC's many competitors, only Enova International (ENVA-$14) has that good of a recommendation from S&P. Market Edge, Ned Davis Research, Raymond James, Zacks, The Motley Fool, Merrill Lynch and Goldman Sachs have “buy” recommendations on CACC. Apparently, Vanguard, Wellington, BlackRock and 173 other institutional holders, who own a total of 14 million of the 19 million outstanding shares, agree.

However, I was startled to discover that since June 2016, various officers and directors have sold nearly 2 million shares of CACC, worth over $500 million. Now it looks as if the short sellers are circling the stock, as short interest is intense. Because recent sellers include the president, the treasurer, the chief financial officer and the chief legal officer, I'm inclined to follow their lead. Place a good-till-canceled order to sell CACC at $259.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at [email protected]. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at

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