Credit Acceptance Corporation (CACC) has navigated the complex automotive financing industry for over five decades, establishing itself as a leader in providing innovative solutions to dealers and consumers. With a steadfast commitment to its mission of "Positively Changing Lives," the company has weathered various economic cycles, technological advancements, and regulatory changes, emerging as a resilient and adaptable player in the market.
Company History and Evolution
Founded in 1972, Credit Acceptance began as a provider of retail installment contracts to automobile dealerships owned by its founder, Donald Foss. During the 1980s, the company expanded its services to non-affiliated dealers, offering them a non-recourse cash payment, referred to as an "advance," against anticipated future collections on the consumer loans the dealers assigned to Credit Acceptance. This innovative approach paved the way for the company's growth and solidified its position as a trusted partner for dealers seeking to serve consumers with limited or impaired credit histories.
Business Model and Programs
Credit Acceptance's business model evolved to include two primary financing programs: the Portfolio Program and the Purchase Program. These programs were designed to share both the risk and reward of collecting on Consumer Loans with the Dealers, incentivizing them to assign higher quality loans, adhere to underwriting guidelines, and provide appropriate service and support to consumers. This unique approach has been instrumental in fostering strong, long-term relationships with dealers across the United States.
Under the Portfolio Program, CACC advances money to dealers, referred to as a Dealer Loan, in exchange for the right to service the underlying consumer loans. Under the Purchase Program, CACC buys the consumer loans directly from the dealers, referred to as Purchased Loans, and keeps all amounts collected from the consumers.
As the company expanded its geographic reach, it faced the ongoing challenge of accurately forecasting Consumer Loan performance, particularly given that the majority of its loans are made to individuals with impaired or limited credit histories. To address this, Credit Acceptance has continuously refined its forecasting methodologies, striving to improve accuracy and maintain a competitive edge in the market.
Diversification and Additional Revenue Streams
In addition to its core financing programs, Credit Acceptance has diversified its revenue streams by offering ancillary products to consumers. These include vehicle service contracts and guaranteed asset protection, provided through relationships with third-party providers. The company has also established a captive reinsurance subsidiary, VSC Re Company, which reinsures coverage under certain vehicle service contracts. These additional product offerings have become an integral part of Credit Acceptance's business strategy, contributing to its overall financial stability and growth.
Adapting to Industry Changes
Over the years, Credit Acceptance has navigated significant changes in the automotive industry, including the rise of e-commerce, the increasing prominence of electric vehicles, and the evolving preferences of consumers. The company has consistently demonstrated its ability to adapt to these shifts, refining its product offerings and technology platforms to better serve its dealer partners and the consumers they serve.
Financials
One of the key factors contributing to Credit Acceptance's resilience is its diversified revenue streams. The company's primary sources of revenue include finance charges, premiums earned from ancillary products, and other income streams such as program fees and administrative fees. This diversification has helped the company weather fluctuations in any single revenue source, ensuring a more stable financial performance.
For the year ended December 31, 2024, CACC's revenue was $2.16 billion, up 13.7% from the prior year. This increase was primarily driven by a 13.5% rise in finance charges, which make up the majority of CACC's revenue at 92.2% in 2024. The growth in finance charges was due to a 13.6% increase in the average net Loans receivable balance, which reached $7.53 billion as of December 31, 2024.
The company reported annual net income of $247.9 million, annual operating cash flow of $1.14 billion, and annual free cash flow of $1.14 billion for the most recent fiscal year. In the most recent quarter, CACC reported revenue of $565.9 million and net income of $151.9 million. The increase in revenue and net income for the most recent quarter compared to the prior year quarter was primarily due to an increase in finance charges driven by growth in the average net Loans receivable balance. The Company also saw a decrease in the provision for credit losses compared to the prior year quarter.
CACC's Dealer Loans and Purchased Loans, collectively referred to as Loans, made up the company's Loans receivable balance. As of December 31, 2024, Dealer Loans accounted for 72.3% of the total net Loans receivable balance, while Purchased Loans made up the remaining 27.7%. The unit volume of Dealer Loans assigned to CACC was 78.7% of total Consumer Loan assignments in 2024, up from 74.0% in the prior year, while Purchased Loans decreased from 26.0% to 21.3% of the total.
The profitability of CACC's Loans is primarily driven by the spread between the forecasted collection rate and the advance rate, less operating expenses and cost of capital. For 2024 Consumer Loan assignments, the spread was 21.4% for Dealer Loans and 21.8% for Purchased Loans as of December 31, 2024. These spreads improved compared to 2023 due to better than expected performance of the 2024 loan vintages relative to the 2023 vintages.
CACC closely monitors the credit quality of the Consumer Loans assigned to the company. The majority of the Consumer Loans, around 80.6% in 2024, are made to individuals with FICO scores below 650 or no FICO scores. CACC uses a statistical model to estimate the expected collection rate for each Consumer Loan at the time of assignment, and continues to evaluate the expected collection rate over the life of the Loan. Changes in the amount and timing of expected future net cash flows are recognized as provision for credit losses expense.
In 2024, CACC recorded a $814.7 million provision for credit losses, up 10.7% from the prior year. This included a $493.8 million provision related to changes in forecasted net cash flows, as the company decreased its estimates of future collections due to underperformance of more recent loan vintages. The provision for new Consumer Loan assignments was $320.9 million in 2024, relatively flat compared to 2023.
Additionally, Credit Acceptance's robust financial position has been a crucial aspect of its success. As of December 31, 2024, the company reported a strong balance sheet, with total assets of $8.85 billion and a net debt position of $6.01 billion.
Liquidity
The company's liquidity position, with $343.7 million in cash and cash equivalents, further enhances its ability to navigate changing market conditions and seize growth opportunities. CACC has a $390 million revolving secured line of credit facility and several secured warehouse facilities with total borrowing capacity of $1.32 billion. The total available credit line as of December 31, 2024, was $1.73 billion. The Company was in compliance with all debt covenants as of December 31, 2024.
Other key liquidity metrics include: - Debt/Equity Ratio: 3.63 as of December 31, 2024 - Current Ratio: 20.11 as of December 31, 2024 - Quick Ratio: 20.11 as of December 31, 2024
Stakeholder Alignment and Business Strengths
One of the notable strengths of Credit Acceptance's business model is its focus on aligning the interests of its key stakeholders – dealers, consumers, team members, investors, and the communities it serves. By offering dealers a profitable and efficient method for financing consumers who may not qualify for traditional financing, Credit Acceptance has created a mutually beneficial ecosystem that has fostered long-term relationships and repeat business.
Resilience During Challenging Times
Despite the challenges posed by the COVID-19 pandemic and the subsequent economic volatility, Credit Acceptance has demonstrated its resilience. The company's ability to quickly adapt its operations, implement robust risk management practices, and maintain strong relationships with its dealer network has enabled it to weather the storm and emerge stronger.
In recent performance, CACC's Q4 2024 used dollar volume was the second highest ever, indicating they likely exceeded their previous guidance for this metric. However, the company noted that their growth slowed significantly during the quarter, though it was still their second highest Q4 unit and dollar volume ever. The company's loan portfolio reached a new record high of $8.9 billion on an adjusted basis, up 15% from the previous year.
Future Outlook
Looking ahead, Credit Acceptance remains well-positioned to capitalize on the evolving automotive financing landscape. The company's commitment to innovation, technological advancements, and a customer-centric approach positions it to continue serving its dealer partners and consumers with excellence. As the company navigates the complexities of the industry, investors can take comfort in its proven track record of adaptability and its unwavering dedication to its mission of "Positively Changing Lives."
However, the company faces some challenges. The 2022 vintage loans continued to underperform expectations, while other vintages remained stable during the recent quarter. CACC made scorecard changes in Q3 2024 that resulted in lower advance rates, which likely contributed to the slower growth in the fourth quarter. Beyond the key drivers of collections and originations, the company stated they continued making progress towards their mission of maximizing intrinsic value and positively changing the lives of their key constituents.
Industry Trends and Competition
The market for consumers who do not qualify for conventional automobile financing is large and highly competitive. Credit Acceptance faces competition from buy here, pay here dealerships, banks, captive finance affiliates of automobile manufacturers, credit unions, and independent finance companies. The industry has experienced growth in recent years, with a compound annual growth rate of approximately 5% over the past 3 years.
Legal Matters
Credit Acceptance is involved in several significant legal matters:
1. On December 1, 2021, the company received a subpoena from the Office of the Attorney General for the State of California seeking documents and information regarding GAP products, GAP product administration, and refunds.
2. On May 7, 2019, the company received a subpoena from the Consumer Frauds and Protection Bureau of the Office of the New York State Attorney General, relating to the company's origination and collection policies and procedures in the state of New York. Additional subpoenas were received through April 30, 2021, relating to the company's origination, collection, and securitization practices. On November 19, 2020, and August 23, 2022, the company received letters indicating that litigation may be commenced against it.
3. On April 22, 2019, the company received a civil investigative demand from the Consumer Financial Protection Bureau seeking information relating to the company's origination and collection of Consumer Loans, TPPs, and credit reporting. Additional subpoenas were received through March 7, 2022. On December 6, 2021, the company received a Notice and Opportunity to Respond and Advise letter from the Staff of the Office of Enforcement of the Bureau, stating that the Staff was considering whether to recommend legal action against the company.
4. On January 4, 2023, the Office of the New York State Attorney General and the Consumer Financial Protection Bureau jointly filed a complaint against the company alleging deceptive practices, fraud, illegality, and securities fraud.
These legal matters underscore the regulatory scrutiny faced by Credit Acceptance and the importance of maintaining compliance with consumer protection laws and regulations in the automotive financing industry.