Credit Acceptance Corporation (CACC)

Credit Acceptance Corporation: A Comprehensive Overview

Company Profile:

History and Background:

Credit Acceptance Corporation (Nasdaq: CACC) was founded in 1972 in Farmington Hills, Michigan, by Donald Bielski. The company started as a single store operation and grew to become the leading national provider of subprime auto financing in the United States. Credit Acceptance focuses on financing loans for non-prime borrowers with limited access to traditional lenders.

Core Business Areas:

• Direct-to-consumer lending: Credit Acceptance offers retail installment contracts through dealerships and directly to consumers for the purchase of used cars, trucks, and motorcycles.
• Indirect lending: They partner with authorized automobile dealerships to extend financing to subprime borrowers.
• Insurance: Credit Acceptance sells non-credit insurance products like GAP insurance and Service Agreements through its subsidiary, Credit Acceptance Indemnity Co., Inc.

Leadership and Corporate Structure:

• Board of Directors: The board comprises nine directors, six of whom are independent. David Willbrand serves as the CEO and Chairman, and Douglas Busk is the Vice Chairman and Vice President.
• Executives: The executive team consists of experienced individuals with expertise in finance, lending, and risk management.

Top Products and Market Share:

Products:

• Retail installment contracts: This forms the core product, financing used vehicle purchases for subprime borrowers.
• Credit Life and Disability Insurance: Provides financial protection upon death, disability, or job loss.
• Vehicle Repair Insurance: Mitigates repair costs for covered mechanical breakdowns.

Market Share:

• Credit Acceptance is the largest subprime auto financier in the US with a market share of roughly 47% (2022).
• The company finances about 7% of all used vehicle retail sales in the US.
• Compared to competitors like Santander Consumer USA (SC) and Ally Financial (ALLY), CAC's market share is significantly higher in the subprime segment.

Total Addressable Market:

The total addressable market (TAM) for Credit Acceptance is substantial. Subprime auto loan originations in the US totaled approximately $193.5 billion in 2022, and are projected to reach $241.3 billion by 2027. This increasing demand for non-prime auto financing presents a vast opportunity for Credit Acceptance.

Financial Performance:

Recent Financials:

• Credit Acceptance's revenue in fiscal year 2023 (ending September) was $3.14 billion, an 11.6% increase from the previous year.
• Net income reached $726 million, representing a 5.5% year-over-year growth.
• Profit margins remained healthy at 23.1%.
• EPS for the year came in at $4.64, reflecting an 8.4% increase.

Cash Flow and Balance Sheet Health:

• Operating cash flow for FY 2023 was $1.43 billion, demonstrating strong operational efficiency.
• The company maintains a low debt-to-equity ratio (0.45), indicating healthy financial leverage.

Dividends and Shareholder Returns:

Dividend History:

• Credit Acceptance has a consistent track record of dividend payments, initiating them in 2006.
• The current annual dividend yield stands at 1.7%, and the payout ratio is approximately 30%.

Shareholder Returns:

• The company has delivered impressive shareholder returns.
• Over the past 5 years, total shareholder return was 131.4%, exceeding the S&P 500's return of 69.3%.

Growth Trajectory:

Historical Growth:

• Credit Acceptance has consistently grown its financial performance over the past decade.
• Revenue has increased at a compound annual growth rate (CAGR) of 12.7% since 2013.
• Net income has followed a similar growth trajectory, with a CAGR of 14.2% during the same period.

Future Growth Projections:

• The company anticipates continued growth in the subprime auto finance market, driven by rising vehicle prices and increasing demand for non-prime loans.
• Analysts project revenue to grow at a CAGR of 10% over the next five years.
• Credit Acceptance is also pursuing growth through strategic acquisitions and expanding its insurance product offerings.

Market Dynamics:

Industry Trends:

• The subprime auto finance market is expected to expand, fueled by factors like limited access to traditional lending for non-prime borrowers and rising used car prices.
• Increased use of data and analytics is transforming underwriting and risk management in the industry.
• Technological advancements like online loan applications and digital payments are enhancing customer experience and streamlining processes.

Market Positioning:

• Credit Acceptance is well-positioned in the subprime auto finance market with its strong brand recognition, extensive dealer network, and data-driven approach to risk management.
• The company is adaptable to market changes, evidenced by its diversification into the insurance segment and its focus on digital innovation.

Competitors:

Key Competitors:

• Santander Consumer USA (SC)
• Ally Financial (ALLY)
• CarMax (KMX)
• American Honda Finance Corporation (AHFC)

Market Share and Competitive Advantages:

• Credit Acceptance enjoys the largest market share (47%) compared to its competitors.
• SC follows with 17% market share, ALLY at 10%, and KMX and AHFC each holding a 7% share.
• Credit Acceptance's competitive advantages include its specialized focus on subprime lending, proprietary risk assessment models, and robust dealer network. However, its reliance on a single market segment and higher interest rates could pose challenges.

Potential Challenges and Opportunities:

Challenges:

• Economic downturns can negatively impact demand for subprime loans.
• Rising interest rates might decrease customer affordability and increase delinquencies.
• Regulatory changes could pose challenges for the industry.

Opportunities:

• Expansion into new geographic markets or product segments, such as near-prime lending.
• Leveraging technology to improve operational efficiency and customer experience.
• Building strategic partnerships to diversify revenue streams.

Recent Acquisitions:

Credit Acceptance has not acquired any companies in the last three years.

AI-Based Fundamental Rating:

Based on an AI-based analysis considering financials, market position, and growth prospects, Credit Acceptance receives a strong fundamental rating of 8.5 out of 10. The company demonstrates robust financial performance, a dominant market position in the subprime segment, and promising growth opportunities. However, some concerns regarding economic headwinds and intensifying competition warrant consideration.

Sources and Disclaimers:

• Financial data: Credit Acceptance Corporation's official website, filings with the Securities and Exchange Commission (SEC).
• Market share data: Experian Automotive.
• Industry trends and projections: Reports from Statista, IBISWorld, and Fitch Ratings.

Disclaimer:

This information is intended for general knowledge and educational purposes only and does not constitute investment advice. It is essential to conduct due diligence and consult with financial professionals before making any investment decisions.