Credit Acceptance Corporation (NASDAQ:CACC) is a financing company that has carved out a unique niche in the automotive industry. With a focus on providing innovative financing solutions to consumers with limited or impaired credit histories, the company has managed to navigate the competitive landscape and deliver consistent financial results over the years.
Company History and Evolution
The company has a rich history, tracing its roots back to 1972 when it was founded as a small business focused on providing auto financing to consumers. Over the past five decades, Credit Acceptance has evolved into a leading player in the subprime auto lending market, leveraging its expertise and proprietary technology to offer a range of financing programs to a nationwide network of automobile dealers.
Credit Acceptance's journey has been marked by significant milestones and challenges. In its early days, the company faced obstacles as it worked to establish its business model and gain the trust of dealers and consumers. However, through perseverance and innovation, Credit Acceptance eventually became a trusted partner to dealers across the country. A pivotal decision in the 1990s to begin reporting consumer loan payment history to major credit bureaus helped consumers with impaired or limited credit histories improve their credit scores, further solidifying the company's position in the market.
The late 1990s saw another significant development with the launch of Credit Acceptance's Portfolio Program. This innovative approach allowed the company to advance money to dealers in exchange for the right to service the underlying consumer loans, helping to grow its loan portfolio and expand its reach. Subsequently, the company introduced a Purchase Program, enabling it to buy consumer loans directly from dealers, further diversifying its offerings.
Resilience and Adaptability
Throughout its history, Credit Acceptance has demonstrated resilience in the face of regulatory scrutiny and legal challenges. The company has remained steadfast in its mission to make vehicle ownership possible for consumers with limited credit options, adapting its products and services to meet the evolving needs of its dealer partners and consumers while navigating economic cycles and changes in the automotive industry.
At the heart of Credit Acceptance's business model is 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 mature. This approach, combined with the company's risk-sharing agreements with its dealer partners, has allowed Credit Acceptance to maintain a relatively stable financial profile even during periods of economic volatility.
Financial Performance
The company's financial performance has been impressive, with a track record of consistent revenue growth and profitability. In the most recent fiscal year (2023), Credit Acceptance reported revenue of $1.88 billion, net income of $286.1 million, operating cash flow of $1.20 billion, and free cash flow of $1.20 billion. The company's strong cash flow generation has enabled it to invest in growth initiatives and return capital to shareholders through share repurchases.
For the third quarter of 2024, Credit Acceptance reported revenue of $550.3 million, representing a 15.0% year-over-year increase. Net income for the quarter was $78.8 million, with operating cash flow of $317.7 million and free cash flow of $317.3 million. The increase in revenue was primarily due to growth in the average net loans receivable balance, which drove an increase in finance charges.
Despite the challenges posed by the COVID-19 pandemic, Credit Acceptance has demonstrated its ability to adapt and maintain its market position. For the nine months ended September 30, 2024, the company reported consolidated net income of $96.0 million, or $7.68 per diluted share, compared to $192.5 million, or $14.73 per diluted share, for the same period in 2023. The decline in net income was primarily due to increases in interest expense and provision for credit losses on forecast changes, partially offset by an increase in finance charges.
Business Segments and Operations
Credit Acceptance operates through two primary product segments: the Portfolio Program and the Purchase Program. The Portfolio Program is the company's core financing solution, where Credit Acceptance advances money to automobile dealers (Dealer Loans) in exchange for the right to service the underlying consumer auto loans. Under this program, the dealer receives a down payment from the consumer, a non-recourse cash payment advance from Credit Acceptance, and after the advance balance and related fees have been recovered, the dealer receives the cash from payments made on the consumer loan, net of Credit Acceptance's servicing fee and certain collection costs.
The Purchase Program is Credit Acceptance's alternative financing solution, where the company buys consumer auto loans directly from dealers (Purchased Loans) and keeps all amounts collected from the consumer. As of September 30, 2024, the net Dealer Loans receivable balance was $5.57 billion, or 71.6% of the total $7.78 billion net Loans Receivable balance. The remaining $2.21 billion was comprised of Purchased Loans.
For the three months ended September 30, 2024, Credit Acceptance recognized $507.6 million in finance charge revenue, up 14.9% compared to the prior year period. This increase was primarily driven by a 14.9% growth in the average net Loans Receivable balance, which reached $7.69 billion. The company's average yield on the Loan portfolio remained flat at 26.4% during the quarter.
Competitive Advantages
One of the key factors that has enabled Credit Acceptance to weather the challenges of the pandemic and remain competitive is its focus on diversifying its loan portfolio. The company's two-pronged financing approach, with the core Portfolio Program and the supplemental Purchase Program, has allowed Credit Acceptance to serve a wide range of automobile dealers and consumers while closely monitoring loan performance to maintain the profitability of its Loan portfolio.
Future Outlook and Guidance
Looking ahead, Credit Acceptance remains focused on leveraging its expertise and technology to drive growth and maintain its competitive edge. The company's investment in enhancing its product offerings and improving the speed at which it can respond to dealer and consumer needs is a key priority. Additionally, the company's ongoing efforts to modernize its technology infrastructure and expand its team of skilled professionals are expected to support its long-term success.
In terms of guidance, Credit Acceptance has noted that its 2022 loan vintage, as well as the 2021, 2023, and 2024 vintages, have underperformed expectations. This resulted in a modest 0.6% or $62.8 million decline in forecasted net cash flows. The company attributes these declines to factors such as increased competition, vehicle price declines, and the impact of inflation.
Despite these challenges, Credit Acceptance believes it will continue to produce substantial economic profit per share in the future. The company has noted that even its worst-performing vintage (2022) is still forecasted to produce economic profit. For the 2023 and 2024 loan vintages, Credit Acceptance's forecasted collections are 4 and 6 percentage points higher, respectively, compared to 2022. However, the company has adjusted its initial estimates on these more recent vintages to account for the underperformance seen in 2021-2022.
Risks and Challenges
Credit Acceptance faces ongoing challenges in navigating a highly competitive and regulated industry. The company's reliance on accurate forecasting of consumer loan performance and its ability to access capital on favorable terms are critical factors that could impact its financial results. Additionally, Credit Acceptance has faced regulatory scrutiny and legal challenges. In 2021, the company received subpoenas from the Office of the New York State Attorney General relating to its origination, collection, and securitization practices. In 2023, the Attorney General and the Consumer Financial Protection Bureau jointly filed a lawsuit against Credit Acceptance alleging deceptive practices, fraud, and securities fraud. The case is currently pending.
Liquidity and Financial Position
As of September 30, 2024, Credit Acceptance reported a debt-to-equity ratio of 3.80 and held cash and cash equivalents of $159.7 million. The company has access to a $390 million revolving secured line of credit facility and a $20 million uncommitted revolving secured line of credit facility, with $409 million available under these facilities as of the same date. Credit Acceptance's current ratio and quick ratio both stood at 23.40, indicating a strong liquidity position.
Conclusion
Overall, Credit Acceptance's long history of success, its innovative financing solutions, and its focus on operational excellence make it a compelling investment opportunity for those seeking exposure to the automotive finance sector. While the company faces challenges related to underperforming loan vintages and regulatory scrutiny, its ability to adapt to market conditions and maintain profitability suggests resilience. As Credit Acceptance continues to navigate the evolving market landscape, its ability to capitalize on emerging trends and manage risks will be key drivers of its future performance.