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Robert Abbott
Robert Abbott
Articles (176)  | Author's Website |

Credit Acceptance Corporation: Could “No Credit, No Problem” Produce Capital Gains?

June 30, 2014 | About:

No doubt you’ve seen them too, those auto dealer ads that promise everyone qualifies for credit, that you can drive home the car of your choice today, even if you have a credit rating number you can count on your fingers.

While the dealer does the advertising, the credit line may come from Credit Acceptance Corporation (NASDAQ:CACC), currently found on the Undervalued Predicatable list at Gurufocus.

Can a company that specializes in bad credit risks really be predictable? Could it really be undervalued, in any circumstances? That’s what we’ll examine here.

The CACC Business Model

Fans of Warren Buffett (Trades, Portfolio) and Peter Lynch might be forgiven if they scratch their heads over the simplicity, or lack of it, in this business model.

Providing credit, even to high risk borrowers, is obviously a simple business at its core. Lenders looking for outsized returns have done this kind of business for centuries, if not millennia, and they often pay a price for going so far out on a credit limb.

Credit Acceptance Corporation has addressed this dilemma by adding adding layers of sophisticated practices and technologies. That’s made understanding the full business model much more difficult.

For example:

  • Most of the company’s business is done by making advances to dealers on loans, rather than issuing loans outright;
  • It has developed software and algorithms that allow it to instantly assess the likelihood of repayment, and price the loan accordingly
  • IT solutions allow it to stay on top of potential payment problems, starting with a phone call to a borrower the day after a loan payment is missed.
For more on the company’s credit management model and practices, see the 2013 Shareholder Letter.

The bigger question, of course, is whether these sophisticated overlays work well enough to make Credit Acceptance predictably and consistently profitable. Here’s a GuruFocus chart showing EBITDA (red), Revenue (green) and EPS (blue), per share:


Takeaways: Credit Acceptance Corporation operates in a business that’s been around almost as long as people have been around. But, it has added sophisticated (and complex) measures that eliminate at least some of the volatility that normally plagues subprime lenders. And, that produces a chart that many, more staid, companies would envy.

Company History

  • 1967: founder Don Foss opens a car lot in Detroit, MI, and subsequently becomes, as the company’s website http://www.creditacceptance.com/aboutus.aspx puts it, “...one of the world's largest independent used car dealers in the 1970's and 1980's.”
  • 1972: the Credit Acceptance company founded, in Southfield, MI;
  • 1992: Goes public, as CACC, on NASDAQ;
  • 2001: Its electronic credit assessment software system, Credit Approval Processing System (CAPS) launched - the 2013 Shareholder Letter tells us, “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. We take 60 seconds, and we approve 100% of the applications submitted, 24 hours a day, seven days a week. In addition, our CAPS system makes our program easier for dealers to use, and allows us to deploy much more precise risk adjusted pricing.”
Takeaways: A company with an extensive history and roots in the auto retailing business; 22 years as a public company.


Based on information provided at the company website:

  • CEO: Brett A. Roberts, age 47, has a background in finance, including a stint as Chief Financial Officer. He joined the company in 1991;
  • President: Steven M. Jones, aged 50, joined the company in 1997 as Manager of Debt Recovery in the United Kingdom. He has also served as Chief Analytics Officer;
  • Chief Financial Officer: Kenneth S. Booth, age 46, previously held a senior management position at PricewaterhouseCoopers LLP;
  • Chairman of the Board: Donald A. Foss, age 70, has extensive experience in the used car business, as well as in consumer financing;
  • Other board members have food retailing, private investment, and personal lending backgrounds; no one from the auto business sits on the board.
  • Governance: CACC gets a poor score on the ISS Governance QuickScore, 7 out of 10. As the ISS website notes, “A decile score of 1 indicates lower governance risk, while a 10 indicates higher governance risk.” It draws red flags for Board Composition, Voting Formalities, Pay for Performance, Use of Equity, and Equity Risk Mitigation (it would be helpful to see some justification for the last flag, however that information is not accessible to non-clients of ISS). CACC earns one star, for Voting Issues, under the Shareholder Rights section.
Takeaways: The management team shows strength in the financial sector, however, aside from Mr. Foss, the company has no directors or senior officers listing experience in the automotive industry.


It’s striking to note the difference between the number of shares outstanding and the float:

  • Outstanding: 23,460,000
  • Float: 13,230,000
As we can see, a sizable chunk of Credit Acceptance Corporation’s shares are not on the market, something we’ll further consider in the Insiders section below (information and charts from GuruFocus, unless otherwise noted).

  • Gurus: Only one guru, Jim Simons (Trades, Portfolio), has a significant holding - 328,000 shares, representing almost 1.5% of his holdings. Five others had holdings of less than 6,000 shares, as of March 31, 2013;
  • Institutional Investors: 35% of outstanding shares;
  • Insiders: 29%, a high proportion of insider ownership for a company of this size. Three holders have more than a million shares: founder Don Foss owns 6.9 million shares, Karol Foss owns 2.2 million shares, and Prescott General Partners LLC owns 1.3 million shares (data from Yahoo! Finance);
  • Short Interests: 3.5%, and as the following chart shows, close to its all-time lows:

Takeaways: Insider holdings indicate a high degree of confidence in the company’s ability to grow its share price (CACC does not pay a dividend). Institutional investors hold a significant proportion of the float, and short interests are low.

Growth Strategy

According to the 2012 Shareholder Letter, growth comes from increases in a metric called unit volume, “Unit volume is a function of the number of active Dealers and the average volume per dealer.”

Adding more dealers, and more loans per dealer, would seem straightforward, but several constraints or potential constraints affect its ability to grow:

Availability of capital: When capital grows scarcer and/or becomes more costly, fewer loans can be written; on the other hand, a contraction can also weed out competitors;

Underwriting standards/pricing: When capital becomes widely available, competitors enter the market or expand within it, subsequently putting pressure on margins;

Recruiting dealers: Credit Acceptance targets the roughly 56,000 independent and franchised dealership in the U.S.A., according to its 10-K report for 2013. The following chart from the same source documents the number of dealers enrolled and currently active:

CACC dealers

Takeaways: To grow, CACC must continue to find and secure capital, underwrite and price competitively but profitably, and recruit/retain dealers. It has managed each of these issues fairly consistently through several economic cycles, including the 2008 crash. Therefore, we believe it safe to assume the company can continue executing this strategy in the near future.

CACC By the Numbers

CACC key statistics

Takeaways: The P/E ratio sits well below 15, at 12.6; the number of shares repurchased in 2013 is a sizable proportion of the float and outstanding; ROE is impressive.

Financial Strength

As the following GuruFocus box shows, CACC scores 7 out of 10 for financial strength:

CACC financials

GuruFocus also issues one Medium Warning Sign, for the company’s Altman-Z Score. However, Altman-Z is not generally applicable to financial firms, because of the nature of their assets (not much brick and mortar).

The following chart shows more relevant indicators for this company:


Free cashflow per share (blue) has risen consistently with the price, while debt to equity (red) has generally stayed at the same level.

And, CACC has earned a 5-Star (the highest) ranking for predictability. According to GuruFocus backtesting, 5-Star companies as a group return 12.1% per year, and only 3% have been in a loss position after 10 years.

Takeaways: Credit Acceptance Corporation exhibits strong financial characteristics. Taken together with the Predictability score and the Profitability & Growth metrics, the company seems comfortably positioned for future growth.


The thumbnail valuation box shows two undervalued ratings, and two overvalued ratings (Tangible Book is not relevant):

CACC valuation

  • Projected Free Cash Flow: $177.12
  • Median P/S Value: $118.80
  • Graham Number: $87.71
  • Peter Lynch Value: $254.75
  • Average valuation: $159.60
Turning to the Valuation & Return metrics, we see mostly positive readings (along with a couple of neutral readings):

Takeaways: A company with a consistent history of growth, we find nothing unexpected in an average valuation of $159.60. That represents a 22% premium over the current price of $123.89 (as noted, 5-Star Predictabily stocks averaged gains of 12.1% per year).


  • Credit Acceptance Corporation has room to grow its dealer enrollments; currently only about 11% of America’s 56,000 dealers are ‘active’;
  • The number of loans per dealer, and the value of those loans, can grow -- assuming the company can secure and deploy capital with reasonable margins, something the company has done well since becoming a public company;
  • In the shorter term, key metrics will continue to ebb and flow with economic and business cycles, including those that affect auto sales, loan repayments, and interest rates.
  • It has business intelligence and systems already in place to underwrite and price successfully; it may also increase profitability by improving collection rates.
Takeaways: There appear to be no reasons why CACC should not continue to grow profitably. It has a strong history of profitable growth, a good management team, and the tools needed to survive in what can be, at times, a highly competitive environment.


Since the financial crisis of 2008, the price of Capital Acceptance Corporation has risen dramatically, as the following chart shows:


Sharp pullbacks from time to time have punctuated that growth. If you believe, as I do, that the current price represents simply another pullback and not the beginning of a downward trend, then Capital Acceptance Corporation is worth investigating further. That’s backed by the Predictability rating, which suggests CACC could generate above average capital gains.

About the author:

Robert Abbott
Robert F. Abbott has been investing his family’s accounts since 1995, and in 2010 added options, mainly covered calls and collars with long stocks.

He is a freelance writer, and his projects include a website that provides information for new and intermediate level mutual fund investors (whatisamutualfund.com).

As a writer and publisher, Abbott also explores how the middle class has come to own big business through pension funds and mutual funds, what management guru Peter Drucker called the Unseen Revolution. In Big Macs & Our Pensions: Who Gets McDonald's Profits?, he looks at the ownership of McDonald’s and what that means for middle class retirement income.

In an eclectic career, Robert Abbott was a radio news writer and announcer, a newsletter writer and publisher, a farmer, a telephone operator, and a construction worker. When not working, he has been a busy volunteer, which includes more than a decade of leadership roles at the Airdrie Festival of Lights, one of North America’s leading holiday light displays. He lives in Airdrie, Alberta, Canada.

Visit Robert Abbott's Website

Rating: 5.0/5 (2 votes)



Robert Abbott
Robert Abbott premium member - 3 years ago

In a note with the June 2014 Value Idea Contest Announcement, the editors at GuruFocus asked, "... if the company approves 100% of the applications, how can it manage the risk?" (the company being Credit Acceptance Corporation, CACC, which is analyzed above).

It's a good question, and one I wish I had addressed more directly within the article. But, on the basis of better late than never, here are my thoughts on this question (with quotes from CACC's 2013 Annual Report and 10-K Report):

First, the company says in several of its annual reports, "We take 60 seconds, and we approve 100% of the applications submitted, 24 hours a day, seven days a week."

How is this possible? CACC gives credit first to its highly sophisticated loan application software, CAPS, which incorporates not only the usual loan application information, but also sifts through the its millions of records to assess likelihood of default, collection, etc.

With all this information combined, Credit Acceptance can then pinpoint the exact lending rate it needs to charge to earn a predetermined profit. This is the rate that is then offered to the applicant, who may then accept or reject it.

Here's how the company describes the process, "At the time of assignment, we forecast future expected cash flows from the Consumer Loan. Based on these forecasts, which include estimates for wholesale vehicle prices in the event of vehicle repossession and sale, we make an advance or one-time purchase payment to the related Dealer at a level designed to achieve an acceptable return on capital." (advance payments accounted for 93.5% of loan units).

When a loan is initiated, CACC shares the risk with the dealer, providing only an advance on the loan, rather than 'buying' it, until certain conditions are met. Those advances are assigned to pools of at least 100 consumer loans, and if dealers have more than one pool, these pools are cross-collateralized.

And, the company keeps improving its collection capabilities, focusing on just this one line of business, "We understand the daily execution required to successfully service a portfolio of automobile loans to customers in our target market. There are many examples of companies in our industry that underestimated the effort involved and produced poor financial results." Collection costs may be charged back to the dealer.

For dealers, the attraction is reduced risk, "Since typically the combination of the advance and the consumer’s down payment provides the Dealer-Partner with a cash profit at the time of sale, the Dealer-Partner’s risk in the Consumer Loan is limited."

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