Credit Acceptance (CACC, Financial) had an outstanding year. Sales rose 16% and operating earnings rose 30%. Earnings per share grew 22%, held back by a return to a normal tax rate after an unusually low rate the prior year. The market for subprime auto loans remains highly competitive. Despite that, the company’s underwriting discipline remains strong. A change in accounting rules will sharply curtail the company’s GAAP earnings in the coming year, but the change in accounting optics has no bearing on the economics of the business. Market concerns about how car loans will perform in a recession kept Credit Acceptance’s valuation at an attractive level for most of 2019. Because Credit Acceptance has a disciplined and differentiated approach to underwriting loans, we believe it would continue to thrive in a recessionary environment and may well grow market share as competitors struggle with losses.
From Ruane Cunniff (Trades, Portfolio)'s Sequoia Fund mangement performance discussion for 2019.
