Is Credit Acceptance Stock A Buy?

Credit Acceptance Corp (NASDAQ:CACC) is an auto finance company that partners with automotive dealers to provide loans and other financial products. This company struggled recently due chip shortages that caused car manufacturing to slow to a crawl.

Sales of new cars plummeted by nearly 50 percent at the height of the pandemic, according to J.D. Power. The historic high unemployment rate caused people to hold onto their current vehicles longer while favoring used automobiles over new. This creates an issue for the upstream lender.

However, this subprime lender could experience a boom of customers as people slide into lower financial demographics. COVID-19 created economic turbulence that could take the remainder of the decade to recover from.

Where does that leave CACC? Is Credit Acceptance Stock A Buy?

Credit Acceptance Repo Rate Is Eye-Popping

Credit Acceptance Corp is an automobile financing company that operates through a network of dealers. It features two main programs: its “Portfolio Program” and its “Purchase Program,” both of which target dealers to buy the rights to service its underlying car loans.

The company was founded in 1972 by Donald Foss, who owned one of the largest used car dealers in the world at the time. By 1992, the company went public on the Nasdaq exchange through an initial public offering (IPO).

Because it’s a subprime lender, Credit Acceptance Corp gets is compared to mortgage subprime lenders frequently. It’s not surprising given that it provides high-interest loans to people with less-than-stellar credit scores. As a result, it is reported to repossess 35 percent of cars it finances, creating a murky business model.

But it’s operating legally as far as we know, so there’s no clear reason to hate the company for its customers’ inability to pay. Does that mean you should own stock in it though?

Is Credit Acceptance Corp Stock a Buy?

Credit Acceptance Corp has mixed reviews from analysts. Some believe it’s doomed to fail because of the issues outlined above making it difficult to collect from borrowers with no liquidity.

However, others believe the economic conditions will favor subprime lending, especially as ridesharing services like Uber (UBER) and Lyft struggle to keep drivers on the road.

Ridesharing drivers could receive higher compensation, which in turn could spark a surge in car purchases. Still, skeptics argue that the company could be overweight at a frothy $7 billion market capitalization.

The company’s revenues and earnings can help to determine whether it’s a good buy for your portfolio. There are several analysts who published their research and ratings on the company, and none rate it as a Buy. Clearly, they see something, so let’s breakdown analyst forecasts.

Credit Acceptance Corp Revenues and Earnings Forecasts

There are currently only six analysts offering a forecast for Credit Acceptance Corp, and the median target is $390.50. The company posted $451 million in revenue for the first quarter of 2021 ending in March. That beat the consensus estimate by 5.40 percent.

In May, it announced $450 million in asset-backed financing, compared to $500 million in the previous quarter. This means its revenue for the next quarter is likely to fall accordingly, unless the company makes a lot of money on repossessing vehicles on the backend.

Car buying could pick up, as people move back into the office. But there’s still public transportation and part-virtual schedules that could reduce travel times. It’s possible we’re entering a new era where vehicles aren’t even owned.

In fact, many autonomous vehicle companies are aiming for exactly that target by the end of the decade. Should people stop owning cars altogether, it’s feasible that companies like Credit Acceptance Corp fade into obscurity as their relevancy diminishes.

Of course, it’s impossible to forecast earnings surprises without the inside information that only the company has, and its accounting methods make it difficult. It could very well outperform 2020, but there’s still the matter of its valuation to consider.

Is Credit Acceptance Corp Valuation Fair?

Most analysts believe Credit Acceptance Corp is overvalued when trading above $367 per share – that’s based on a discounted cash flow analysis.

As a subprime lender, Credit Acceptance Corp could find itself in regulatory crosshairs. It wasn’t long ago that Wells Fargo faced inquiries, regulatory fines, and class-action lawsuits over improperly charging customers for force-placed auto insurance.

The same predatory lending crisis that rocked the mortgage industry in the 2000s could come back to bite this company and its investors if they’re not careful. The current economy is fragile with threats of inflation and higher rates. Such exogenous threats loom large for CACC share price.

Is Credit Acceptance Corp Stock a Buy? The Bottom Line

Credit Acceptance Corp is a subprime auto lender that works directly with dealers to services its collateral-backed loans. This gives it access to large volumes of automobile loans, however the overall volume of those loans decreased significantly in the post-pandemic economy.

As the economy picks back up, it’s unclear if automobile buying will return. There’s already a shift with major companies working on self-driving fleets for public transportation. We could be entering an era where nobody buys a car.

And in the time we’re still buying them, this subprime lender could find itself in the regulatory hot seat. Some view the firm as the “Countrywide Home Loans of car buying”, and that means it could be at the center of an economic collapse like CHL was in the 2000s if it’s not careful. 

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.