Shares of CACC are up 50 % in the past 3 weeks following an
statement of a stock buyback by the business The business.
reported a bad Q3, and an examination by the NY AG caused the
stock to decrease. Management is very attuned to its stock price and
made use of a prompt announcement to make a short squeeze and drive
the stock rate up. Shares are tough to obtain, which
exacerbated the current run-up. The business does not have enough
money on its balance sheet to finish the announced buyback and
would likely need to additional take advantage of its balance sheet if it
intends to go through with it.
Subprime Automobile Financing Market Overview
The only kind of credit that has exceeded the pre-crisis (2006).
peak in terms of origination each year and overall balance impressive.
it is automobile financing, led by subprime car. According to the Center.
for Accountable Financing, the marketplace share of loans made to a.
below-prime (FICO 660) borrower as a portion of overall car loans.
has enhanced from 20 % in 2010 to 38.7 % in 2014. To make things.
more budget-friendly, the typical subprime automobile loan term is 71 months.
(certain loan providers offer as long as 96-month pre-owned carauto loan), which.
is a year longer than a prime car loan. 31 + Day delinquencies.
have actually enhanced from 5.9 % in 2011 to 8.4 % in 2014 (highest level.
since 2008). There is an argument to be made that the delinquencies.
are actually still synthetically low as lenders selectget the rate of.
their foreclosures keeping delinquencies reduced. Making.
things worse, loan providers enable dealerships to make loans that go beyond the.
value of the vehicle (see example listed below), which permit for funding of.
damaging equity or the amount owned when a trade-in car is.
worth less than loan on the trade-in. Existing subprime car LTV is.
Credit Acceptance Corp. (CACC or Company) is a.
Michigan-based deep subprime car financing business with a special.
business design. Rather than buying whole automobile loans from the.
dealership, CACC advances specific portion (~ 50 %) of the loan to the.
dealer upon sale of the automobile in exchange for the right to.
service (at 20 % maintenance cost) and collects the underlying loan.
For instance, a $15,000 vehicle with $3,000 or 20 % deposit requires.
financing on the remaining $12,000. With a prevailing ~ 20 % interest.
rate and 48-month maturity (CACCs current portfolio statistics).
relates to roughly $18,000 of cumulative payment earnings over four.
years. Provided the fundamental threat of the customer (manythe majority of the.
business customers are below 550 FICO and 100 % loan approval.
rate), CACC estimates that 70 % of $18,000 to be an affordable.
collectible amount of money, or $12,500. The company then advances 50 % of.
the $12,500 or $6,250 to the dealership and book $6,250 on the asset.
side of the balance sheet as a receivable. As a payment from the.
borrower is available in, Credit Acceptance first collects the 20 %.
servicing fee ($1,562), then the next $6,250 is utilized to pay for.
its receivable. The next $4,688 ($12,500 collectible amount of money after.
service cost of $1,562 and paid for advance of $6,250) gets divided.
– 20 % to CACC for servicing cost and 80 % to the dealer. If the.
customer continues to pay (in excess of anticipated 70 % healing), the.
dealership gets 80 % and CACC collects an incremental 20 % maintenance fee.
Technically, this model allows for danger sharing in between the dealership.
and CACC as theoretically the dealer is not incentivized to put the.
debtor in a car he/she can not afford as they maintain a part of the.
(click to enlarge).
While CACCs credit metrics are exceptional to its peers due to its.
special program, the recent losses have actually been well listed below historic.
averages with 2010-2014 charge-offs per typical receivable of 0.2 %.
(2008 – 4.3 %, 2007 – 1.6 %, 2006 -1.9 % and 2005 – 3.0 %). We also.
observed the business booking trends and discovered that while the rest.
of the market is increasing its reserves due to degeneration in.
early-stage delinquencies in the majority of recent vintages, CACC is really.
decreasing its reserves per dollar of receivables.
As you can deduct from the example above, CACCs spread out or IRR.
on a loan is the difference in between the reasonably presumed.
collection amount of approximately 70 % and the advance ratio of 40-50 %.
(Q2 was 45.7). That spread has actually compressed from 33 % in 2010 to 23 %.
in 2015 as both collections anticipate boiled down and advance.
percentage quantities rose. However, the companys operating income.
virtually doubled from $253mill in 2010 to $462mill over the exact same.
five-year period. We find the factors for this earnings jump.
unsustainable and artificially inflated.
We discovered a number of interesting trends in CACCs statements.
over the last 6 years:
1) The loan duration extended from 38 months 2009 to 49 months.
a. This information mentions to a fascinating phenomenon. A less.
sophisticated auto borrower is often asked What sort of regular monthly.
payment are you looking for? when talking with the automobile salesperson.
With the extension of tenor from 38 to 49 months and keeping both.
annual rate of interest and down payment fixed at 20 %, a $300 month.
payment would permit for a $12,000 loan in 2010 and $15,000 loan in.
2) Increase in CACCs dealer penetration more than doubled from.
3,206 in 2010 to 7,247 in 2014.
3) System volume increased from 136,813 to 223,998 in 2014.
(annualizing 1H 2015, the full-year number suggests north of.
300,000 this year).
b. Note that system volume per dealership has weakened from 42.
units per active dealer in 2010 to 31 systems in 2014, recommending.
that incremental includes are not able to press as much volume we.
think primarily due to extreme competitors in the subprime.
4) Finance charges per device are basically flat at $2,242 in.
2010 and $2,282 in 2014.
5) Expense of debt reduced from 8.2 % in 2010 to 3.2 % in 2014.
Previously in the year, CACC offered $250mill of senior unsecured.
notes at 7.4 %.
6) Business financial obligation as a percentage of overall capital enhanced.
from 50 % to 73 %.
An interesting gambit in the earnings model is the accounting.
treatment of real collections being adjusted versus the preliminary.
forecast (70 % in our example). If 70 % drops to 65 %, a one-time.
arrangement cost is recorded, but if the collections come in above.
forecast at 75 %, the boost is recognized over the life of the.
loan, recommending a higher deterioration in earnings if a) credit.
gets worst or b) utilized vehicle prices degrade. This is where we.
think the companys credit stresses will reveal its awful head. At.
one point, the market will resolve low supply originating from.
the 2008-2009 decline in automobile production, loan liquidity will dry.
up and will press secondhand vehicle prices down. Per business 10-K, a 1 %.
decrease in the forecasted future net money flowcapital on loans would have.
minimized 2014 net income by $8.9 mill or 3.5 % of net incomeearnings. The.
historic variance of approximated collections vs. real collections.
have been for the a lot of part within the 2 % range with a couple of outliers.
both positive (2009 and 2010 when business got too conservative on.
collections) and negative (2007 at the peak of the simple credit). In.
addition, CACC has 40 % foreclosure rate or 4 in 10 borrowers do.
not make it through the end of the loan, making the recuperation rate.
even more delicate.
In early June this year, CFPB announced its oversight of.
non-bank automobile financing business with a focus on 4 aspects: fair.
and clean disclosure of auto finance terms, auto lenders supplying.
precise details to credit bureaus, collections and the fair.
treatment of clients upon debt collections by auto financing.
business and providing fairly. The rule went into result in early.
August, and we expect CACC to receive a letter from the CFPB. We.
believe that 20 % servicing cost along with additional fees that are.
not clearly defined which amount of moneytotal up to 15 % of the advance together with.
aggressive collection strategies need to raise some eyebrows with.
regulators. Burred in its.
(pg32) released late on Friday 11/6, CACC announced that it.
received a subpoena from the NY AGs Civil Rights Bureau relating.
to the business origination and collection of consumer loans. The.
effect of this could be severe as it is not able to approximate.
affordable possible loss or range of reasonably possible.
CACCs Fair Value.
The company trades at 17X 2015 Approximated EPS, which we thinkour company believe.
is peak earnings. Subprime car group Santander Customer (NYSE:.
) 6X 2015 EPS, Ally Financial (NYSE:.
) 9.5 X 2015 EPS and Consumer Portfolio Services (NASDAQ:.
) trades at 4.7 X 2015 EPS. We believeOur company believe that at this part of the.
cycle, 10X EPS is a reasonable valuation for CACC.
EPS in our base case assuming 10 % dealer growth, spread.
compression of added 2 % and expense of debt boost of 50bps.
(every 100bps increase in cost of debt impacts net income by 30 %),.
CACC earns ~$12.50 per share. In a bear case, where CFPB impacts.
the dealer habits or materially affects CACCs design (cutting.
servicing and ancillary fees), the revenues could be anywhere.
between $5 and $10 per share. As a result, we think that the stock.
can trade as low as $50 and as high as $125 per share, representing.
a significant return from the current $245 per share price.
Duke Energy Spearheads A Profile That Is Pounding.