Americredit ACF
September 10, 2007 - 3:39pm EST by
chaney943
2007 2008
Price: 16.83 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 1,900 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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Description

Description: ACF is the largest independent sub prime finance co in the country and also operates in Canada and has about $15.5B in receivables.  In terms of size, COF and Wachovia/Westcorp are actually bigger but their portfolios are much more focused toward prime credits.  The company targets receivable growth of 15% with a range of 0-25%.  ROE's are in the high teens with ROA's in the 2-3% range.  The company's core business (about $12.5B of the portfolio) has 17% yields and 12% lifetime losses.  Recently (the past year) the company added Long Beach Acceptance which has about 12% yields and 5-7% lifetime losses and was a direct competitor to Westcorp.  ACF also bought Bay View (formerly CTL credit) which writes 84 month terms to prime borrowers and runs with 10% yields and 2% lifetime losses.

 

During the early 2000's, the company's stock collapsed as low as $2 (from $60) when it had liquidity issues as their static pools were cross collateralized (rising losses in one affected all and trapped cash) but that is not the case today.  Today the co. has tremendous liquidity with $910M in cash on the balance sheet (it needs not keep more than $300M) and it has reduced the shares outstanding form 176M three years ago to 126M pro forma at Sept 30th with an ongoing buyback program.   I estimate the shares outstanding will fall to 110M by Q4 2008 when the fully hedged convert expires.

 

Valuation: The stock is at $17.  Tangible book is $15.84.  However if the convert that expires in Nov. 2008 is excluded (it’s fully hedged) book is $17.40 and hence the stock trades at 1.0x adjusted book.   The stock is 5.5x Q4 2008 EPS which I think is the key time period to look as because 10% of the float goes away at this point. (Shares outstanding go form an estimated 120M to 110M--there are 126M at Sept qtr end.)

 

The last 3 relevant deals (Onyx by COF, Westcorp by Wachovia, and Long Beach by AmeriCredit) have all gone at 12-14x forward EPS and 2.3-2.4x book which equates to a $40-45 take out on 2009 EPS for ACF.  I continue to believe ACF has the most desirable specialty finance business that is still independent with 15% EPS growth, high teens ROE's, and 2-3% ROA's.

 

Recent trends: The last qtr was very good and credit quality was excellent.  The company beat published and our EPS est. by a few pennies.  However, the company lowered FY June 2008 est. from a $2.65-$2.85 range to $2.50-$2.75 range.  We were always at the low end of the range and are still in the $2.60 range.  The cut in estimates was primarily margin related due to the widening spreads in the ABS market.  Credit is actually running slightly better than expected but we are entering the seasonally worse second half of the year and there is large seasonality in this business.  Hence, at least optically, the next 4 months of data will look progressively worse and we are coming off very good vintages in the 04 and 05 origination years which performed better than expected.  The December month and quarter will look the worst of all seasonally.

 

More specifics on credit: ACF plans in its core business for 12% cumulative static pool losses. (Long Beach and Bay View have lower losses of 5-7% and 2% respectively.)  During the 2003/2004 vintage years losses actually got as low as 8% on its core product as both tighter underwriting, rising repo recovery rates, and a great economy helped reduce losses.  2006 static pools are trending toward 12%.  The highest losses ever got to was 14-15% in the early 2000's but this was partially due to auction recovery rates plummeting from the low 50% range to the low 40% range fueled by massive selling of the auto rental companies fleets. Today, auction recovery rates stand in the low 50% range which are near an all time high.  There is a close correlation between ACF's loss rate and the unemployment rate.  Finally, ACF has been writing longer term business the past year and some have said this will lead to more losses.  I am not as sure as longer terms means lower monthly payments which makes the vehicle more affordable.

 

For our estimates we have losses gradually going to 5.25% in q4 2008 from the current low of 3.29% but last qtr's 4.5%.  Management has guided to 4-5% losses for the FY ending June 2008 so we are pretty much in line with guidance. The loss rate will be the key driver here. A 5.25% loss rate is about 14% lifetime losses on its core product or toward 2001 levels of losses.

 

Other key assumptions include a 20 bp decline in net interest margins this qtr and than stability, a slight improvement in G+A leverage as Long Beach and Bay View Servicing platforms are integrated (2.8% to 2.6% of assets, and 15% origination growth - management has guided to a range of 0 to 25% growth).

 

The securitization market and margins: I have great confidence ACF will do a securitization at reasonable spreads at the end of Sept and it will be a big positive for the stock.  ACF did a deal in Oct 1999, the 2nd company to do so after Chrysler.  The auto ABS market is very liquid and if ACF did a deal now they said it would be at 70 bp over the 2 year--all in.  (The range over the past 15 years is 35-70 bp.)  However, the 2 year has come in 60 bp (the relevant index) from 4.8% to 4.2% since August 1st.  Moreover, ACF is RAISING RATES by at least 30 bp and the price increases are being followed by other players (COF and Wells--C and HSBC are cutting back).  Hence, I actually think there will be little margin compression and the widening ABS market will turn out to be a big positive to the tune of 50 bp.

 

Huge insider buying: Clifton Morris bought 168K shares or $2.8M last week.  He never buys and is retired.

Catalyst

The last 3 relevant deals (Onyx by COF, Westcorp by Wachovia, and Long Beach by AmeriCredit) have all gone at 12-14x forward EPS and 2.3-2.4x book which equates to a $40-45 take out on 2009 EPS for ACF. I continue to believe ACF has the most desirable specialty finance business that is still independent with 15% EPS growth, high teens ROE's, and 2-3% ROA's.
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    Description

    Description: ACF is the largest independent sub prime finance co in the country and also operates in Canada and has about $15.5B in receivables.  In terms of size, COF and Wachovia/Westcorp are actually bigger but their portfolios are much more focused toward prime credits.  The company targets receivable growth of 15% with a range of 0-25%.  ROE's are in the high teens with ROA's in the 2-3% range.  The company's core business (about $12.5B of the portfolio) has 17% yields and 12% lifetime losses.  Recently (the past year) the company added Long Beach Acceptance which has about 12% yields and 5-7% lifetime losses and was a direct competitor to Westcorp.  ACF also bought Bay View (formerly CTL credit) which writes 84 month terms to prime borrowers and runs with 10% yields and 2% lifetime losses.

     

    During the early 2000's, the company's stock collapsed as low as $2 (from $60) when it had liquidity issues as their static pools were cross collateralized (rising losses in one affected all and trapped cash) but that is not the case today.  Today the co. has tremendous liquidity with $910M in cash on the balance sheet (it needs not keep more than $300M) and it has reduced the shares outstanding form 176M three years ago to 126M pro forma at Sept 30th with an ongoing buyback program.   I estimate the shares outstanding will fall to 110M by Q4 2008 when the fully hedged convert expires.

     

    Valuation: The stock is at $17.  Tangible book is $15.84.  However if the convert that expires in Nov. 2008 is excluded (it’s fully hedged) book is $17.40 and hence the stock trades at 1.0x adjusted book.   The stock is 5.5x Q4 2008 EPS which I think is the key time period to look as because 10% of the float goes away at this point. (Shares outstanding go form an estimated 120M to 110M--there are 126M at Sept qtr end.)

     

    The last 3 relevant deals (Onyx by COF, Westcorp by Wachovia, and Long Beach by AmeriCredit) have all gone at 12-14x forward EPS and 2.3-2.4x book which equates to a $40-45 take out on 2009 EPS for ACF.  I continue to believe ACF has the most desirable specialty finance business that is still independent with 15% EPS growth, high teens ROE's, and 2-3% ROA's.

     

    Recent trends: The last qtr was very good and credit quality was excellent.  The company beat published and our EPS est. by a few pennies.  However, the company lowered FY June 2008 est. from a $2.65-$2.85 range to $2.50-$2.75 range.  We were always at the low end of the range and are still in the $2.60 range.  The cut in estimates was primarily margin related due to the widening spreads in the ABS market.  Credit is actually running slightly better than expected but we are entering the seasonally worse second half of the year and there is large seasonality in this business.  Hence, at least optically, the next 4 months of data will look progressively worse and we are coming off very good vintages in the 04 and 05 origination years which performed better than expected.  The December month and quarter will look the worst of all seasonally.

     

    More specifics on credit: ACF plans in its core business for 12% cumulative static pool losses. (Long Beach and Bay View have lower losses of 5-7% and 2% respectively.)  During the 2003/2004 vintage years losses actually got as low as 8% on its core product as both tighter underwriting, rising repo recovery rates, and a great economy helped reduce losses.  2006 static pools are trending toward 12%.  The highest losses ever got to was 14-15% in the early 2000's but this was partially due to auction recovery rates plummeting from the low 50% range to the low 40% range fueled by massive selling of the auto rental companies fleets. Today, auction recovery rates stand in the low 50% range which are near an all time high.  There is a close correlation between ACF's loss rate and the unemployment rate.  Finally, ACF has been writing longer term business the past year and some have said this will lead to more losses.  I am not as sure as longer terms means lower monthly payments which makes the vehicle more affordable.

     

    For our estimates we have losses gradually going to 5.25% in q4 2008 from the current low of 3.29% but last qtr's 4.5%.  Management has guided to 4-5% losses for the FY ending June 2008 so we are pretty much in line with guidance. The loss rate will be the key driver here. A 5.25% loss rate is about 14% lifetime losses on its core product or toward 2001 levels of losses.

     

    Other key assumptions include a 20 bp decline in net interest margins this qtr and than stability, a slight improvement in G+A leverage as Long Beach and Bay View Servicing platforms are integrated (2.8% to 2.6% of assets, and 15% origination growth - management has guided to a range of 0 to 25% growth).

     

    The securitization market and margins: I have great confidence ACF will do a securitization at reasonable spreads at the end of Sept and it will be a big positive for the stock.  ACF did a deal in Oct 1999, the 2nd company to do so after Chrysler.  The auto ABS market is very liquid and if ACF did a deal now they said it would be at 70 bp over the 2 year--all in.  (The range over the past 15 years is 35-70 bp.)  However, the 2 year has come in 60 bp (the relevant index) from 4.8% to 4.2% since August 1st.  Moreover, ACF is RAISING RATES by at least 30 bp and the price increases are being followed by other players (COF and Wells--C and HSBC are cutting back).  Hence, I actually think there will be little margin compression and the widening ABS market will turn out to be a big positive to the tune of 50 bp.

     

    Huge insider buying: Clifton Morris bought 168K shares or $2.8M last week.  He never buys and is retired.

    Catalyst

    The last 3 relevant deals (Onyx by COF, Westcorp by Wachovia, and Long Beach by AmeriCredit) have all gone at 12-14x forward EPS and 2.3-2.4x book which equates to a $40-45 take out on 2009 EPS for ACF. I continue to believe ACF has the most desirable specialty finance business that is still independent with 15% EPS growth, high teens ROE's, and 2-3% ROA's.

    Messages


    SubjectNew Writeup
    Entry09/10/2007 03:39 PM
    Memberchaney943
    Description:

    Description: ACF is the largest independent sub prime finance co in the country and also operates in Canada and has about $15.5B in receivables.  In terms of size, COF and Wachovia/Westcorp are actually bigger but their portfolios are much more focused toward prime credits.  The company targets receivable growth of 15% with a range of 0-25%.  ROE's are in the high teens with ROA's in the 2-3% range.  The company's core business (about $12.5B of the portfolio) has 17% yields and 12% lifetime losses.  Recently (the past year) the company added Long Beach Acceptance which has about 12% yields and 5-7% lifetime losses and was a direct competitor to Westcorp.  ACF also bought Bay View (formerly CTL credit) which writes 84 month terms to prime borrowers and runs with 10% yields and 2% lifetime losses.

     

    During the early 2000's, the company's stock collapsed as low as $2 (from $60) when it had liquidity issues as their static pools were cross collateralized (rising losses in one affected all and trapped cash) but that is not the case today.  Today the co. has tremendous liquidity with $910M in cash on the balance sheet (it needs not keep more than $300M) and it has reduced the shares outstanding form 176M three years ago to 126M pro forma at Sept 30th with an ongoing buyback program.   I estimate the shares outstanding will fall to 110M by Q4 2008 when the fully hedged convert expires.

     

    Valuation: The stock is at $17.  Tangible book is $15.84.  However if the convert that expires in Nov. 2008 is excluded (it’s fully hedged) book is $17.40 and hence the stock trades at 1.0x adjusted book.   The stock is 5.5x Q4 2008 EPS which I think is the key time period to look as because 10% of the float goes away at this point. (Shares outstanding go form an estimated 120M to 110M--there are 126M at Sept qtr end.)

     

    The last 3 relevant deals (Onyx by COF, Westcorp by Wachovia, and Long Beach by AmeriCredit) have all gone at 12-14x forward EPS and 2.3-2.4x book which equates to a $40-45 take out on 2009 EPS for ACF.  I continue to believe ACF has the most desirable specialty finance business that is still independent with 15% EPS growth, high teens ROE's, and 2-3% ROA's.

     

    Recent trends: The last qtr was very good and credit quality was excellent.  The company beat published and our EPS est. by a few pennies.  However, the company lowered FY June 2008 est. from a $2.65-$2.85 range to $2.50-$2.75 range.  We were always at the low end of the range and are still in the $2.60 range.  The cut in estimates was primarily margin related due to the widening spreads in the ABS market.  Credit is actually running slightly better than expected but we are entering the seasonally worse second half of the year and there is large seasonality in this business.  Hence, at least optically, the next 4 months of data will look progressively worse and we are coming off very good vintages in the 04 and 05 origination years which performed better than expected.  The December month and quarter will look the worst of all seasonally.

     

    More specifics on credit: ACF plans in its core business for 12% cumulative static pool losses. (Long Beach and Bay View have lower losses of 5-7% and 2% respectively.)  During the 2003/2004 vintage years losses actually got as low as 8% on its core product as both tighter underwriting, rising repo recovery rates, and a great economy helped reduce losses.  2006 static pools are trending toward 12%.  The highest losses ever got to was 14-15% in the early 2000's but this was partially due to auction recovery rates plummeting from the low 50% range to the low 40% range fueled by massive selling of the auto rental companies fleets. Today, auction recovery rates stand in the low 50% range which are near an all time high.  There is a close correlation between ACF's loss rate and the unemployment rate.  Finally, ACF has been writing longer term business the past year and some have said this will lead to more losses.  I am not as sure as longer terms means lower monthly payments which makes the vehicle more affordable.


    SubjectQuestions
    Entry09/10/2007 05:39 PM
    Memberdavid101
    Chaney,

    Interesting idea. Have some questions:

    1. Has there been any impact to their credit facilities and repo lines over the past two months?

    2. How much of their business is now prime or near-prime?

    3. If they have all that cash on the balance sheet, why did they issue $200 million of senior notes in June?

    4. Can you explain situation with the converts issued last September and how the warrants and call options impact ACF?

    Thanks,

    David

    SubjectACF vs. NICK
    Entry09/10/2007 06:38 PM
    Memberbroncos727
    This seems very similar to NICK, which has had compelling write ups on VIC several times. Currently, the valuations seem compelling on both. I appreciate this write up. It might help me understand both NICK and ACF if you could comment on any differences between the two. It might be that this is somewhat of a niche market, but beyond that there really isnt any differences, which is ok too. When looking into NICK I looked at their competitor UPFC. I was intrigued by NICK's superior ROA vs UPFC. Is ROA a good metric? Which metrics do you favor for these companies?

    I have been told a takeout for NICK would be around 14$, and that would be generous. Perhaps that was incorrect information or offered only in the context of the current bear market for sub prime specialty finance companies. Why would the ACF takeover premium be so much greater? Were the deals you mentioned transacted in happier times? Has management ever commented on a sale? Given current ROE is seems like you would be content either way. Interesting idea, I am trying to learn more about this industry. Thanks in advance.

    Subjectquestions
    Entry09/11/2007 10:17 AM
    Memberskyhawk887
    Interesting idea.

    As I recall, I thought the post-Sept 11 0% financing moves on the part of the Big 3 automakers also contributed to the declining auction values of used cars. With the Big 3 in big trouble and the Fed looking to cut rates, do you think we could see a similar type of scenario unfold?

    As far as auction recovery rates, do you know why they are at an all-time high. Don't these tend to move in cycles? Does the weak dollar prevent cheap imports from competing with used cars?

    And is the ultimate end-game for this company a sale? Have they ever talked about selling? Who is the the most likely buyer? JPM? Is Jaime Dimon interested in expanding the auto biz? COF seems a bit busy at the moment, as does Wachovia.

    Subjectanswers
    Entry09/25/2007 10:58 AM
    Memberchaney943
    they renewed their facilities and did a securitization at flat all in pricing--lower t-year--higher spead over 2 year to last deal

    call it 20%--bay view and long beach combined

    the senior notes accelerated a stock buy back

    On the converts--i am not completely clear

    Subjectanswers to Nick
    Entry09/25/2007 10:59 AM
    Memberchaney943
    I don't know NICK--sorry
    ROA is the right metric--ROMA that is
    takeover deal pricing has been remarkably similiar for 15 years

    SubjectDramatically falling auction r
    Entry09/25/2007 11:02 AM
    Memberchaney943
    Dramatically falling auction rates are a real risk here--they assime low to mid 40% recovery rates and are running at 50%--lot fewer cars coming to auction today with rental car fleets reduced than afer 9/11--but the risk is real

    Most likely buyer is a big bank--JPM wuld be #1 to me

    Subjectleucadia
    Entry04/18/2008 11:41 AM
    Memberfinn520
    From LUK's recent shareholder letter, dated 4/16/08:

    "As of this writing, we have acquired 26% of AmeriCredit Corp. ("ACF") for $373.9 million. We have known of this excellent company for many years, having been in the sub-prime auto business ourselves. ACF has made and financed over $53 billion of these loans and none of its lenders has lost a penny. In this environment, financing for ACF is goign to be very difficult and management is taking appropriate steps to downsize the company. We are guardedly optimistic that the fniancial market will climb out of its bunker next year. People need auto financing to get to work."
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