Michigan-based Credit Acceptance (CACC, Financial) provides subprime financing programs through a nationwide network of automobile dealers (12,528 active dealers as of 2018) for vehicle buyers with limited access to traditional sources of consumer credit. Through two different programs, the company either shares some loan risks with dealers or absorbs all the risks itself.
In addition to its unique business model, Credit Acceptance’s management also attracts us. In our view, the company’s investor relation materials demonstrate a high-quality capital allocator from the shareholder perspective. We strongly recommend alpha-seeking investors to take a look at their annual shareholder letters and the section of investor questions.
At Urbem, we highly appreciate it when the management primarily focuses on return instead of growth. Credit Acceptance has been referring to the economic profit as its top KPI since the year 1999, during which Tom Tryforos, a private investor, joined the Board and persuaded the management to establish a minimum required return on capital. The message was clear: if the business could not earn more than its cost of capital, it needed to give that capital back to shareholders. We cannot agree more on the company’s attitude towards capital allocation. Below are a couple of excerpts from the company's shareholder literature:
“Critical success factors include our ability to accurately forecast Consumer Loan performance, access capital on acceptable terms, and maintain or grow Consumer Loan volume at the level and on the terms that we anticipate, with an objective to maximize economic profit. Economic profit is a non-GAAP financial measure we use to evaluate our financial results and determine incentive compensation. Economic profit measures how efficiently we utilize our total capital, both debt and equity, and is a function of the return on capital in excess of the cost of capital and the amount of capital invested in the business.” – 2018 Annual Report
“Using Economic Profit as our primary financial performance measure creates an incentive to keep our return on capital well above our weighted average cost of capital.” – 2018 Shareholder Letter
The shareholder-friendly capital allocation also involves the share repurchase program, as the management has frequently emphasized buying back stocks only at a price below the intrinsic value of the business. We observe that the total numver of shares outstanding has been reduced by more than 40% over the past decade, during which the price to tangible book ratio was mostly below five times and the price to free cash flow ratio was below 15 (see below).
“The Company’s maintains a policy of using excess cash to repurchase shares as long as the current share price does not exceed the current estimate of the intrinsic value.” – 2007 Investor Questions
We also notice that the management at Credit Acceptance tries to avoid value-destructive diversification. For example, in 2006, the company decided to exit the UK and Canada after concluding that the capital invested in both countries could be redeployed at a higher rate of return back in the U.S. The strategic focus helped the business to achieve a meaningful value-generative growth for its shareholders over the next decade or so.
“[Over the last 17 years,] we continued to focus on investing our capital wisely, and consistently earned a return on capital well above its cost, even in years when our loans performed worse than we expected. We gave even more attention to our core business, exiting several non-core businesses that we had started prior to 2002.” - 2018 Shareholder Letter
Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the financial market. We own shares of Credit Acceptance.
GuruFocus 15-year anniversary promotion
The holiday season is here, and so is GuruFocus’s 15-year anniversary! In order to celebrate, we are offering an exclusive holiday discount of up to 30% off on our GuruFocus Premium Membership.
Join now to get GuruFocus Premium membership for only $399/Year! In addition, save an extra $100 when you upgrade to our PremiumPlus Membership, and enjoy $100 off the price of each additional region you add to the subscription.
Don’t miss out on this once-in-a-decade deal! You can sign up for the discount price by clicking this link. Happy holidays!
Read more here:
