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Vera Yuan
Vera Yuan
Articles (1063) 

Credit Acceptance Corporation (CACC) Analysis

December 02, 2013 | About:

Credit Acceptance Corporation (CACC) is one of the U.S. companies listed in Buffett-Munger Screener and Undervalued Predictable Companies Screener on GuruFocus. From the latest guru trades of the third quarter in 2013, we can see Murray Stahl bought it as a new position, while Joel Greenblatt added more shares to his portfolio. Steven Cohen, Jim Simons and Chuck Royce also held CACC in their 09/30/2013 portfolios.

Is this a really company with high-quality business at undervalued or fair-valued price? Is it really a good investment?


Credit Acceptance Corporation (CACC), founded in 1972, is one of the world’s largest independent used car dealers in the 1970s and 1980s. Credit Acceptance is an indirect auto finance company, working with car dealers to enable them to sell cars to consumers on credit regardless of their credit history. Its financing programs are offered through a nationwide network of automobile dealers who benefit from sales of vehicles to consumers who otherwise could not obtain financing, from repeat and referral sales generated by these same customers, and from sales to customers responding to advertisements for their product, but who actually end up qualifying for traditional financing.


There are few barriers to entry in this industry. That’s why Credit Acceptance Corporation has many factors that are required to be successful over time. These include a management team that has the ability to navigate through a variety of economic and competitive conditions, the ability to accurately forecast loan performance, the ability to price loans to make acceptable returns and the development of robust origination and servicing systems and processes. The company believes that these, as well as other factors such as high-quality field sales force and the fact that it offers a comprehensive approach that makes it easier for dealers to serve this market segment are competitive advantages for the company.

1. Highly Focused on Core Product

Credit Acceptance Corporation’s financial success is a result of having a unique and valuable product. It offers one product and focuses 100% of its energy and capital on perfecting this product and providing it profitably. Its core product has remained essentially unchanged for 41 years. The company provides auto loans to consumers regardless of their credit history. It has always believed that individuals, if given an opportunity to establish or reestablish a positive credit history, will take advantage of it.

2. CAPS System

Traditional indirect lending is inefficient. Many traditional lenders take one to four hours to process a loan application, and they decline most of the applications they process. Credit Acceptance Corporation develops the CAPS system, which takes 60 seconds, and approves 100% of the applications submitted, 24 hours a day, seven days a week. In addition, the CAPS system makes Credit Acceptance’s program easier for dealers to use, and allows the company to deploy much more precise risk-adjusted pricing.

3. Profitable Relationship with Dealers

Credit Acceptance’s core business begins with its direct consumers, or what it calls “dealer-partners.” These dealer-partners are the thousands of used car dealers around the U.S. that enroll in CACC’s program to allow them to finance consumers with lower credit ratings. One of the most important accomplishments for Credit Acceptance is learning how to create relationships with dealers who share the same passion with it for changing lives. Forging a profitable relationship requires it to select the right dealer, align incentives, communicate constantly and create processes to enforce standards. It has also developed a much more complete program for helping dealers serve this segment of the market. It believes that continuing to make its program easier for dealers will likely produce additional benefits in the future.


There are three good signs for CACC. Its financial strength is strong. It has shown predictable revenue and earnings growth. Its operating margin is expanding. You can see the detailed 10-year data charts below.

GuruFocus develops Financial Strength Rank to measure how strong a company’s financial situation is. The maximum rank is 10. We believe that companies with rank 7 or higher are unlikely to fall into distressed situations.



CACC’s revenue per share has continued to grow from 3.3 at December 2003 to 23.8 at December 2012, with an average annual growth rate of 24.6% over the last 10 years. Its operating margin is expanding from 43.5 in 2003 to 56.3 in 2012. It ranks higher than 89% of 124 companies in the global credit services Industry. Among the same industry, a company with higher operating margin is more efficient in its operation. It is more stable during industry slowdown or recessions. Peter Lynch also prefers those companies with higher margins than those with lower margins.


Donald A. Foss is the founder and significant shareholder of the company, in addition to owning and operating companies engaged in the sale of used vehicles. He has been the chairman of the board of directors of Credit Acceptance Corporation since March 1992 and served as its chief executive officer until Jan. 1, 2002.

Brett A. Roberts has worked with CACC since 1991 and was named CEO in 2002. He has continued Foss' legacy in leading growth for the company and has further established its dominance in the auto credit services industry.

Credit Acceptance Corporation has developed a strong management team. Because the company is successful at retaining its managers, it becomes stronger each year as it gains experience with its business. Its senior management team, consisting of 19 individuals, averages 12 years of experience with the company. While the company has added talent selectively over the past few years, the experience of the team is a key advantage.

Credit Acceptance Corporation’s management team is quite decent and effective. Compared with its competitors (NICK, WRLD, TCAP), we can see CACC has a really high ROE of 35.30% and ROA of 10.30%, both ranked higher than 90% of the companies in the global credit services industry. It has the relatively high operating margin of 56.30%, compared with 78% of TCAP, 39.60% of NICK, and 29.40% of WRLD. It also has the highest 10-year revenue growth rate of 24.60%, 10-year earnings growth rate of 30.10%, five-year revenue growth rate of 24.90%, and one-year earnings growth rate of 25.50%. CACC is a fast growing company.


1. Peter Lynch Fair Value & Peter Lynch Chart

Since the company has strong financial strength, high profitability and consistent growth, we can use Peter Lynch’s method to value the stock. In the top middle part of CACC’s summary page, we can see the Peter Lynch value for CACC is $253.95. Peter Lynch thinks that the fair P/E value for a growth company equals its growth rate, that is PEG = 1. The earnings here are trailing twelve month (TTM) earnings. The growth rate we use is the 5-year EBITDA growth rate. Then Peter Lynch fair value = PEG * 5-year EBITDA Growth Rate * Earnings per Share, which we can get for CACC is $253.95. This is higher than the current stock price.

As of Nov. 25, 2013, the Peter Lynch Chart is showed below:


From the Peter Lynch chart, we can see for the recent 10 years, each time the stock price was lower than the price at P/E=15, the stock price would go up. The stock continuously went up from around $25 in 2008 to nearly $125 nowadays. Now that the stock price is still lower than the projected price, from the historical experience, we might expect that stock price to go up again.

2. Multiple Valuation: Price to Book Ratio (PBR) & Price to Earnings Ratio (PER)


We used the P/B band to get the price range. Over the past 10 years, CACC was traded between 1.1 to 5.2 times. We used the median PBR (price to book ratio) band value of 3 to calculate the eventual price. With this method, we got the projected price of CACC at $90.3. The current stock price is $124.7, which is higher than the projected price we mentioned earlier.


Similarly, we used the P/E band to get the price range. Over the past 10 years, CACC was traded between 5.9 to 40.3 times. We used the median PER (price to earnings ratio) band value of 13.2 to calculate the eventual price. With this method, we got the projected price of CACC at $133.9. If we use the Peter Lynch P/E=15 to calculate the eventual price, the result is $152.4. The current stock price is $124.7, which is lower than both of the two projected P/E prices we mentioned earlier.

3. Discounted Cash Flow Intrinsic Value model (DCF)

The details of how we calculate the intrinsic value based on Discounted Cash Flow Intrinsic Value (DCF) are described in detail here. This method smooths out the free cash flow over the past six to seven years, multiplies the results by a growth multiple, and adds a portion of total equity. Value = (Growth Multiple) * FCF(6 year avg) + 0.8 * Total Equity(most recent).

Using the Discounted Cash Flow Intrinsic Value model (DCF), GuruFocus calculates the intrinsic value for CACC, which is $160.54 as of September 2013. The current stock price of CACC is $124.7. These figures give us a general idea that CACC is more likely to be undervalued. The stock might have the chance to go up more.

4. DCF Fair Value

862603978.jpg In the DCF page for CACC, we can calculate the DCF fair value using DCF Fair Value Calculator developed by GuruFocus. The recent earnings per share annual data is $9.15. For a company like CACC we believe for the next 10 years the growth rate will still be as high as the earnings growth rate for the past 10 years. The past 10-year earnings growth rate is 30.10%, the five-year growth rate is 37.50%, and the 12-month growth rate is 25.20%. For growth rate higher than 20%, to be more conservative, we use 20% as the growth rate for the next 10 years. GuruFocus users can set their own growth rate and see what value they can get. We assume the years of terminal growth to be 10 and the terminal growth rate to be 4%. This is because no company can guarantee to continue to grow at a high growth rate forever. It is more reasonable to set this growth rate close to inflation rate. The long-term average return of the stock market is around 11%. Investors can always passively invest in an index fund and get an average return. For CACC, I assume the stock performance will be better than the stock market. In this way, I assume it to be 12%. GuruFocus users can set their own desired expect return as the discount rate. Putting all these parameters into the calculator, we get the CACC’s fair value to be $260.48, which gives us the margin of safety of 52%.

5. Screeners which CACC Can Pass

Credit Acceptance Corporation (CACC) is one of the U.S. companies listed in Buffett-Munger Screener on GuruFocus. Buffett-Munger Screener can be used to find companies with high quality business at undervalued or fair-valued prices:

  1. Companies that have high Predictability Rank, that is, companies that can consistently grow their revenue and earnings.
  2. Companies that have competitive advantages. They can maintain or even expand profit margin while growing their business.
  3. Companies that incur little debt while growing their business.
  4. Companies that are fair valued or under-valued. We use PEPG as the indicator. PEPG is the P/E ratio divided by the average growth rate of EBITDA over the past five years.
We can say under Buffett-Munger Screener, Credit Acceptance Corporation is a company with “predictable and proven” earnings and traded at a discount.

CACC is also showed on the list of Undervalued Predictable Companies - Discount Cash Flow and Discount Earnings Screener. Under Undervalued Predictable Companies Screener, the intrinsic value = book value + future earnings at growth stage +terminal value. The value using the discount cash flow model for CACC is $333. The value using discount earnings model is $261. Both indicate CACC is traded at discount.

6. Share Repurchase

Since beginning its share repurchase program in mid-1999, the company has repurchased approximately 28.1 million shares at a total cost of $879.4 million. In 2012, it repurchased approximately 1.7 million shares at a total cost of $151.0 million.

The company spent a lot of money on shares repurchase. Why? As explained in its annual report:

“We have used excess capital to repurchase shares when prices are at or below our estimate of intrinsic value (which is the discounted value of future cash flows). As long as the share price is at or below intrinsic value, we prefer share repurchases to dividends for several reasons. First, repurchasing shares below intrinsic value increases the value of the remaining shares. Second, distributing capital to shareholders through a share repurchase gives shareholders the option to defer taxes by electing not to sell any of their holdings. A dividend does not allow shareholders to defer taxes in this manner. Finally, repurchasing shares enables shareholders to increase their ownership, receive cash or do both base on their individual circumstances and view of the value of a Credit Acceptance share. (They do both if the proportion of shares they sell is smaller than the ownership stake they gain through the repurchase.) A dividend does not provide similar flexibility.”


From the above share repurchase chart, we can see the long-term effect of the share repurchase program is very promising. It is clearly showed that after three years of each quarterly share repurchase, the stock price went up a lot. This is even true in recent five years that the stock prices went up a lot within one year after quarterly share repurchase. The results indicate that the company did have a large amount of excess capital, which is good to grow business. The company may believe the current stock price is below its estimated intrinsic value. And the company is very good at share repurchases. We might expect the stock price to go up even more after share repurchases in 2013.


1. The degree of competition in the marketplace tends to be driven by economic and credit market conditions. The market was very competitive in the 2003 to 2007 periods while the market has been much less competitive since early 2008. That’s why the revenue growth and net income growth was relatively slow during 2003 to 2007 compared with the situation after 2008. With interest rates low and capital widely available, the competition returns to the market throughout 2011 and 2012. We expect that the competitive environment will continue to be cyclical in the future and that competition will increase over the course of the next few years. When the market is competitive, it is more challenging to grow its business. The revenue growth rate might slow down.

2. The inability to accurately forecast and estimate the amount and timing of future collections could have a materially adverse effect on results of operations. Substantially all of the consumer loans assigned to the company are made to individuals with impaired or limited credit histories or higher debt-to-income ratios than are permitted by traditional lenders. Consumer loans made to these individuals generally entail a higher risk of delinquency, default and repossession and higher losses than loans made to consumers with better credit. Recent economic conditions have made forecasts regarding the performance of consumer loans more difficult. In the event that its forecasts are not accurate, its financial position, liquidity and results of operations could be materially adversely affected.

3. The company may be unable to execute its business strategy due to current economic conditions. Although its pricing strategy is intended to maximize the amount of economic profit it generates, within the confines of capital and infrastructure constraints, there can be no assurance that this strategy will have its intended effect.

4. The company may be unable to continue to access or renew funding sources and obtain capital needed to maintain and grow its business. The availability of additional financing will depend on a variety of factors such as market conditions, the general availability of credit, its financial position, its results of operations and the capacity for additional borrowing under our existing financing arrangements. If its various financing alternatives were to become limited or unavailable, it may be unable to maintain or grow consumer loan volume at the level that it anticipates and its operations could be materially adversely affected.

5. Its Altman Z-score of 2.10 is in the grey area. This implies that the company is in some kind of financial stress. If it is below 1.8, the company may face bankruptcy risk.

6. The current stock price is close to a 10-year high of $127.35. Its stock P/S ratio of 4.61 is close to five-year high of 5.06.

7. Credit Acceptance Corporation has been issuing new debt. Over the past three years, it issued USD971.554 million of debt.


I have no current position held at the time of writing. The purpose of this article is purely research for GuruFocus. This is not a recommendation to buy or sell any stock at any given time.

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Rating: 3.3/5 (11 votes)



Tannor - 3 years ago    Report SPAM
Awesome article and very in depth. Thanks!

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GuruFocus has detected 5 Warning Signs with Credit Acceptance Corp $CACC.
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