Credit Acceptance Stock Is Estimated To Be Modestly Undervalued

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May 10, 2021
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The stock of Credit Acceptance (NAS:CACC, 30-year Financials) is estimated to be modestly undervalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $424.03 per share and the market cap of $7.1 billion, Credit Acceptance stock shows every sign of being modestly undervalued. GF Value for Credit Acceptance is shown in the chart below.

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Because Credit Acceptance is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth, which averaged 17.9% over the past three years and is estimated to grow 7.47% annually over the next three to five years.

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Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Credit Acceptance has a cash-to-debt ratio of 0.01, which which ranks in the bottom 10% of the companies in Credit Services industry. The overall financial strength of Credit Acceptance is 3 out of 10, which indicates that the financial strength of Credit Acceptance is poor. This is the debt and cash of Credit Acceptance over the past years:

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It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. Credit Acceptance has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $1.7 billion and earnings of $40.21 a share. Its operating margin is 53.52%, which ranks better than 80% of the companies in Credit Services industry. Overall, GuruFocus ranks the profitability of Credit Acceptance at 9 out of 10, which indicates strong profitability. This is the revenue and net income of Credit Acceptance over the past years:

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One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Credit Acceptance is 17.9%, which ranks better than 75% of the companies in Credit Services industry. The 3-year average EBITDA growth is 1.8%, which ranks in the middle range of the companies in Credit Services industry.

Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Credit Acceptance's return on invested capital is 9.77, and its cost of capital is 5.80. The historical ROIC vs WACC comparison of Credit Acceptance is shown below:

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Overall, Credit Acceptance (NAS:CACC, 30-year Financials) stock gives every indication of being modestly undervalued. The company's financial condition is poor and its profitability is strong. Its growth ranks in the middle range of the companies in Credit Services industry. To learn more about Credit Acceptance stock, you can check out its 30-year Financials here.

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