February 06, 2020 - 6:55pm EST by
2020 2021
Price: 440.00 EPS 0 0
Shares Out. (in M): 18 P/E 0 0
Market Cap (in $M): 8,000 P/FCF 0 0
Net Debt (in $M): 0 EBIT 0 0
TEV (in $M): 0 TEV/EBIT 0 0

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DISCLAIMER: The author of this posting and related persons or entities ("Author") currently holds a long position in this security. The Author makes no representation that it will continue to hold positions in the securities of the issuer. The Author is likely to buy or sell long or short securities of this issuer and makes no representation or undertaking that Author will inform the reader or anyone else prior to or after making such transactions. While the Author has tried to present facts it believes are accurate, the Author makes no representation as to the accuracy or completeness of any information contained in this note and disclaims any obligation to update such information. The views expressed in this note are the opinion of the Author, which may change at any time. The reader agrees not to invest based on this note and to perform his or her own due diligence and research before taking a position in securities of this issuer. Reader agrees to hold Author harmless and hereby waives any causes of action against Author related to the below note.  This note should not be construed as a recommendation to buy or sell any security. 

We have previously written up Credit Acceptance Corp. (“CAC” or the “Company”) on January 14, 2016. Since then its share price has more than doubled but its multiple has remained the same at 13x LTM adjusted EPS while the market multiple has meaningfully expanded (current S&P PE ratio of 25x vs 22x in 2016, or current CAPE ratio of 32x vs 24x in 2016). The Company has done a tremendous job over the last four years and we believe continues to be well-positioned for the next downturn. We want to remind everyone of the opportunity as it remains compelling.

We won’t revisit its business model as it has not changed since our last writeup, instead we will focus on some key metrics and developments during this period. 


LTM adjusted EPS at the time of the original writeup was $15/share. This number has more than doubled to $35/share, growing at 24% p.a. 

The strong growth was primarily due to growth in earnings (21% growth p.a. during the same period) as well as ongoing share repurchases. 


Return on capital has remained stable, and loans continue to be extremely profitable. 

Loan growth 

Loan volume growth has meaningfully slowed during this period, going from 23% at the end of 2015, to 1% at the end of 2019 (dollar growth rates). This is due to the competitive industry backdrop, as capital remains highly accessible for all participants, including those who are currently underwriting loans with little tolerance for erosion in consumer fundamentals. 

We believe that a change in macroeconomic trends or access to credit will enable the Company to return to double digit growth and take share from its competitors. In the meantime, we are confident that the management will continue to test various strategies to improve productivity and return capital to shareholders should incremental attractive opportunities remain unavailable. 

CECL accounting

In August 2018, FASB issued a new rule changing the way financial institutions account for impairments. For CAC, this means moving from its previous credit deterioration model, where the Company books a loss provision only when collections underperform initial forecasted cash flows, to an expected credit loss model, where all expected losses to contractual cash flows are booked at origination. This means that during the initial periods of adoption, the Company’s loss provisions will be significantly overstated relative to the real economic losses incurred.

For large reporting companies, this methodology will be adopted for periods beginning in 2020. Needless to say, while GAAP earnings will be meaningfully depressed in particular near-term or if growth accelerates, this accounting change has absolutely no impact on underlying economics of CAC’s business. The Company has also made amendments to its debt covenants in order to ensure that there will be no impact on its liquidity. 

We believe that a misguided focus on GAAP accounting over business economics by market participants may be creating some overhang on the Company’s share price, and this presents a highly attractive buying opportunity.


I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Macroeconomic downturn

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