Credit Acceptance Corporation (NASDAQ:CACC) is a leading provider of innovative financing solutions that enable automobile dealers to sell vehicles to consumers regardless of their credit history. The company's unique business model has allowed it to consistently deliver strong financial results, even in challenging economic environments.

Financials

For the full year 2023, Credit Acceptance reported annual net income of $286.1 million and annual revenue of $1.901 billion. The company's annual operating cash flow was $1.203 billion, while its annual free cash flow reached $1.199 billion. These impressive figures demonstrate the strength and resilience of Credit Acceptance's business model.

In the first quarter of 2024, Credit Acceptance continued to deliver solid results. The company reported adjusted net income of $117 million, a decrease of 8% compared to the first quarter of 2023. Adjusted earnings per share were $9.28, a 4% decrease from the same period last year. These results were driven by a combination of factors, including a decrease in forecasted collection rates, lower forecasted profitability for consumer loans assigned in 2020 through 2022, and an increase in the company's average cost of debt.

Despite these headwinds, Credit Acceptance's business continued to grow. Unit and dollar volumes increased by 24.1% and 20.2%, respectively, compared to the first quarter of 2023. The average balance of the company's loan portfolio is now the largest it has ever been, increasing by 12% on a GAAP basis and 16% on an adjusted basis compared to the same period last year.

The company also reported an increase in the initial spread on consumer loan assignments, which rose to 22% from 21% in the first quarter of 2023. This reflects Credit Acceptance's ability to price its loans effectively and maintain strong profitability.

Forecasting and Performance

One of the key drivers of Credit Acceptance's success has been its ability to accurately forecast consumer loan performance. The company uses a statistical model to estimate the expected collection rate for each consumer loan at the time of assignment, and it continues to evaluate these expectations as the loans age.

As of March 31, 2024, Credit Acceptance's forecasted collection rates for consumer loans assigned in 2018 through 2020 have been significantly better than its initial estimates, while loans assigned in 2015, 2016, 2021, and 2022 have yielded results that are significantly worse than expected. For all other assignment years, actual results have been close to the company's initial forecasts.

During the first quarter of 2024, Credit Acceptance decreased its estimate of future net cash flows by $30.8 million, or 0.3%, to reflect a decline in forecasted collection rates and slower net cash flow timing. This was primarily due to a decrease in consumer loan prepayments, which remain at below-average levels.

The company's ability to manage these forecasting challenges is a testament to its deep understanding of the subprime auto finance market and its commitment to maintaining a diversified portfolio of loans. By establishing advance rates that are designed to allow for acceptable levels of profitability across its portfolio, even if collection rates are less than initially forecast, Credit Acceptance has been able to navigate the ups and downs of the market.

Liquidity

Another key aspect of Credit Acceptance's success has been its access to capital. The company utilizes a variety of financing sources, including a revolving secured line of credit facility, warehouse facilities, term ABS financings, and senior notes. This diversified approach has allowed Credit Acceptance to maintain a strong financial position and continue growing its business, even in the face of changing market conditions.

During the first quarter of 2024, Credit Acceptance's average cost of debt increased from 4.7% to 7.0%, primarily due to higher interest rates on recently-completed or -extended secured financings and recently-issued senior notes, as well as the repayment of older secured financings and senior notes with lower interest rates. Despite this increase, the company's financial leverage remains modest, with a funded debt to equity ratio of 3.4 to 1 as of March 31, 2024.

Outlook

Looking ahead, Credit Acceptance remains focused on maintaining its leadership position in the subprime auto finance market. The company's guidance for the full year 2024 suggests that it expects to continue growing its loan portfolio and generating strong cash flows, despite the challenges posed by the current economic environment.

Conclusion

Credit Acceptance Corporation is a well-managed and financially sound company that has consistently delivered impressive results. Its unique business model, strong forecasting capabilities, and access to capital have allowed it to navigate the ups and downs of the subprime auto finance market and continue growing its business. With a diversified portfolio of loans, a focus on maintaining profitability, and a commitment to innovation, Credit Acceptance is well-positioned to continue delivering value to its shareholders in the years to come.