Credit Acceptance: Unlocking Value in Subprime Auto Amidst Shifting Tides (NASDAQ:CACC) - CACC Stock Research Report

## Executive Summary / Key Takeaways * Resilient Business Model & Strategic Focus: Credit Acceptance Corporation (CACC) maintains a robust position in the specialized subprime auto lending market, leveraging its unique dealer-centric model and proprietary risk assessment to generate consistent economic profit, even amidst market volatility. The company's strategy prioritizes a significant margin of safety in loan pricing over volume growth. * Technological Edge & Operational Efficiency: CACC's ongoing investment in modernizing its loan origination system and technology architecture has yielded tangible benefits, notably increasing the speed of dealer enhancements by almost 70% year-over-year. This technological differentiation underpins its competitive moat and supports long-term operational effectiveness. * Mixed Financial Performance & Prudent Capital Management: While facing year-over-year declines in loan assignment volumes and underperformance in certain older loan vintages (2022-2024), CACC reported increased net income in Q3 and YTD 2025, driven by higher finance charges and reduced provision for credit losses. The company maintains strong liquidity with $1.59 billion in unused credit and a modest 4:1 funded debt-to-equity ratio, actively repurchasing shares. * Evolving Competitive and Macroeconomic Landscape: The subprime auto market remains highly competitive, with CACC's market share experiencing a slight decline. The company is also attentive to macroeconomic headwinds, including persistent inflation, potential tariffs, and recessionary risks, which could impact consumer affordability and loan performance. * Leadership Transition & Future Outlook: With the upcoming retirement of CEO Ken Booth and the appointment of Vinayak Hegde, CACC is poised for a leadership transition. Management expresses confidence in its ability to secure sufficient financing for future operations, while acknowledging ongoing challenges in forecasting loan performance in a volatile environment. ## The Foundation: Specialized Lending and a Dealer-Centric Model Credit Acceptance Corporation, established in 1972 and headquartered in Southfield, Michigan, has carved a distinct niche in the financial services sector by providing innovative financing solutions that empower automobile dealers to sell vehicles to consumers across the credit spectrum. Operating as an indirect lender, CACC's core business involves acquiring consumer loans originated by dealers, primarily serving individuals with impaired or limited credit histories. This foundational strategy is designed to maximize economic profit over the long term, achieved through a disciplined approach to loan pricing, maintaining modest financial leverage, and diversifying funding sources. The company's business model is structured around two primary programs: the Portfolio Program (Dealer Loans) and the Purchase Program (Purchased Loans). Under the Portfolio Program, CACC advances money to dealers in exchange for servicing rights, with dealers receiving a non-recourse cash payment and future "Dealer Holdback" payments tied to loan performance. Conversely, the Purchase Program involves CACC directly buying consumer loans from dealers for a one-time payment. In 2025, CACC strategically expanded dealer access to its Purchase Program to include consumers with higher credit ratings, reflecting an adaptive market approach. This dual-program structure, coupled with offerings like vehicle service contracts and Guaranteed Asset Protection (GAP) through third-party providers, underpins CACC's integrated value proposition to its dealer network. ## Technological Edge: Driving Efficiency and Innovation A critical differentiator for Credit Acceptance lies in its continuous investment in technology and its engineering team. The company is actively modernizing its key technology architecture and refining how its teams operate, with significant strides made in its loan origination system. This modernization effort has yielded tangible and quantifiable benefits, notably increasing the speed of delivering enhancements to its dealers by almost 70% compared to a year ago. This accelerated pace of innovation allows CACC to deploy more frictionless dealer experiences and bring value to its business and customers more rapidly. For investors, this technological advancement represents a significant competitive moat. By enhancing the efficiency and responsiveness of its loan origination and servicing platforms, CACC can potentially improve its pricing power, reduce operational costs, and strengthen its relationships with dealers. The strategic intent behind these R&D initiatives is to ensure long-term growth and maintain market positioning by continuously improving the product for both dealers and consumers, thereby supporting the company's mission to maximize intrinsic value. ## Competitive Landscape: Navigating a Fragmented and Intense Market Credit Acceptance operates within a highly competitive and fragmented subprime auto lending market. While precise, directly comparable market share figures for all niche competitors are challenging to ascertain, CACC's market share in its core segment of used vehicles financed by subprime consumers was 5.1% for the first eight months of 2025, a decline from 6.5% during the same period in 2024. This reduction in market share and unit volume is attributed to both the company's scorecard change implemented in Q3 2024, which resulted in lower advance rates, and an intensely competitive environment. Direct competitors such as Ally Financial (TICKER:ALLY), Santander Consumer USA (TICKER:SC), OneMain Holdings (TICKER:OMF), and Capital One Financial (TICKER:COF) present varying competitive pressures. Ally Financial, with its diversified digital lending platforms and broader portfolio, offers greater resilience during economic fluctuations and qualitatively more advanced online capabilities for loan processing. CACC, however, distinguishes itself through its specialized subprime focus and deep dealer integration, which can foster stronger customer loyalty in niche segments. Santander Consumer USA, a large-scale subprime auto lender, competes on volume, while CACC's integrated servicing model may offer greater efficiency in collections. OneMain Holdings, with its broader consumer loan offerings and branch network, provides greater accessibility, contrasting with CACC's auto-specific expertise. Capital One Financial, a diversified bank with a significant auto lending division, leverages technological innovation and a large customer base. CACC's competitive advantages lie in its established dealer network, proprietary risk models, and integrated loan servicing. These strengths enable stronger customer loyalty, recurring revenue from loan servicing and reinsurance, and efficient borrower assessment. However, CACC faces vulnerabilities due to its focused model, which can be more sensitive to economic downturns and regulatory changes, and it may lag in broader technological innovation compared to more diversified financial institutions. The company's strategy of prioritizing "solid margins than do chase volume" reflects its disciplined approach in this competitive arena, aiming to produce acceptable returns even if loan performance underperforms initial forecasts. ## Financial Performance: Resilience Amidst Headwinds Credit Acceptance reported a mixed financial performance for the three and nine months ended September 30, 2025. Consolidated net income for the third quarter was $108.20 million, or $9.43 per diluted share, an increase from $78.80 million, or $6.35 per diluted share, in Q3 2024. For the nine months ended September 30, 2025, net income reached $301.90 million, or $25.50 per diluted share, significantly up from $96 million, or $7.68 per diluted share, in the prior year period. This improvement was primarily driven by an increase in finance charges and a decrease in the provision for credit losses, partially offset by higher operating expenses.

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Finance charges rose by $31.80 million (6.3%) in Q3 2025 and $132.30 million (9%) for the nine months ended September 30, 2025, largely due to an increase in the average net Loans receivable balance and a higher average yield on the loan portfolio. The average net Loans receivable balance grew to $7,990.50 million in Q3 2025 from $7,690.90 million in Q3 2024, and to $7,961.50 million for the nine months ended September 30, 2025, from $7,430.40 million in the prior year period. The average yield on the loan portfolio also saw a modest increase. Operating expenses increased by $17.20 million (13.3%) in Q3 2025 and $57.70 million (15.2%) for the nine months ended September 30, 2025. This was mainly due to higher salaries and wages, reflecting investments in team members and increased fringe benefits, and a rise in general and administrative expenses, which included a $15 million contingent loss in Q3 2025 related to legal matters. The cumulative contingent losses related to these legal matters totaled $46.80 million through Q3 2025. The provision for credit losses decreased by $32.70 million (17.7%) in Q3 2025 and $204.80 million (29.6%) for the nine months ended September 30, 2025. This reduction stemmed from lower provisions on forecast changes and new Consumer Loan assignments. While forecasted net cash flows declined by 0.5% ($59 million) in Q3 2025 due to slower cash flow timing and a smaller decline in loan performance, the impact was less severe than in the prior year. The decrease in provision for new assignments was linked to a 16.50% decline in Consumer Loan assignment unit volume in Q3 2025. Loan performance remains a critical area of focus. The 2022, 2023, and 2024 vintages continued to underperform expectations in Q3 2025, while the 2025 vintage exceeded expectations. Management acknowledges that forecasting models are less accurate during volatile economic periods, and the underperformance of the 2022 vintage, in particular, has been attributed to competitive origination periods, peak vehicle valuations, and inflation. Despite these challenges, the 2022 vintage is still projected to generate economic profit. The spread (forecasted collection rate less advance rate) for 2025 Dealer Loans was 22.40%, up from 20.20% for 2024 Dealer Loans, and for 2025 Purchased Loans was 21.30%, up from 21% for 2024 Purchased Loans, reflecting a mix of performance and pricing adjustments. ## Liquidity and Capital Management: A Conservative Stance Credit Acceptance maintains a conservative approach to liquidity and capital management, crucial for its business model. The company's primary capital sources include cash flows from operations, Consumer Loan collections, and various debt facilities. As of September 30, 2025, CACC was in compliance with all covenants under its revolving secured line of credit facility, Warehouse facilities, Term ABS financings, and senior notes. The funded debt to equity ratio stood at 4 to 1. The company's securitization trusts are robustly structured to withstand significant credit risk, generally designed to endure a 35% decline in forecasted collection rates before the most junior bond faces principal loss. CACC asserts that future net cash flows from collateral securing its outstanding securitization debt are more than sufficient to meet all future obligations. As of September 30, 2025, CACC had substantial liquidity, with $1,586.30 million in unused and available revolving lines of credit.

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Recent financing activities include the issuance of $500 million of 6.62% senior notes due 2030 in February 2025, partly used to redeem $400 million of 2026 senior notes. A $400 million Term ABS financing was completed in March 2025. The company also extended the maturity dates and improved interest rates on several revolving secured warehouse facilities throughout 2025, demonstrating continued access to capital markets on favorable terms. This proactive capital management strategy, including a solid cash position maintained partly due to anticipated busy seasons and market uncertainties, underpins the company's financial stability.

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## Risks and Outlook: Adapting to an Evolving Landscape Credit Acceptance faces several key risks, including the inherent difficulty in accurately forecasting future collections, especially during volatile economic periods. Persistent inflation, potential tariffs on U.S. imports leading to higher used car prices, and the possibility of a recession could all negatively impact consumer affordability, increase loss frequency, and decrease demand for automobiles. The company also acknowledges risks associated with the development and use of artificial intelligence, including significant investment requirements, regulatory complexities, and the potential for biased or incorrect outputs. Litigation remains an ongoing concern, with a total recorded accrual balance of $46.80 million for legal matters as of September 30, 2025. Notably, the Consumer Financial Protection Bureau (CFPB) withdrew from a joint lawsuit with the New York State Attorney General in April 2025. In September 2025, CACC made an offer to jointly settle the New York Attorney General matter and a multi-state investigation for a proposed cash payment of $45 million. Looking ahead, management believes that cash flows from operations and diverse financing alternatives will provide sufficient funding for debt maturities and future operations. The company's projected stock-based compensation expense totals $210.30 million through 2029 and thereafter. A significant leadership transition is underway, with CEO Ken Booth retiring in January 2026 and Vinayak Hegde appointed as the new CEO in November 2025. The Board of Directors also authorized the repurchase of up to two million additional shares of common stock in September 2025, bringing the total authorization to 2.16 million shares, signaling confidence in the company's intrinsic value. ## Conclusion Credit Acceptance Corporation stands as a specialized and resilient player in the subprime auto financing market, distinguished by its unique dealer-partner model and a strategic commitment to maximizing economic profit with a substantial margin of safety. Despite facing a highly competitive environment, macroeconomic headwinds, and persistent underperformance in certain loan vintages, the company has demonstrated financial resilience with increased net income in Q3 and YTD 2025. Its ongoing investments in technological modernization are enhancing operational efficiency and strengthening its competitive position. The upcoming leadership transition and the company's proactive capital management, coupled with a disciplined approach to loan pricing, underscore a forward-looking strategy focused on long-term value creation. While challenges such as forecasting accuracy in volatile times and ongoing litigation persist, CACC's robust liquidity, strong securitization structures, and commitment to its core mission position it to continue serving its key constituents and generate acceptable returns for investors, even as the subprime auto landscape evolves.