Credit Acceptance Corporation - University of Oregon Investment

Transcription

UNIVERSITY OF OREGON
INVESTMENT GROUP
June 3, 2011
Financials
Credit Acceptance Corporation
Sell
Stock Data
Price (52 weeks)
Symbol/Exchange
Beta
Shares Outstanding
Average daily volume
(3 month average)
Current market cap
43.06 – 82.29
CACC / Nasdaq
.84
27,489,000
31,346
2.15B
Current Price
Dividend
Dividend Yield
$78.16
NA
NA
Valuation (per share)
DCF Analysis
Comparables Analysis
Target Price
Current Price
$67.87
$71.55
$71.00
$78.16
Summary Financials
Revenue
Net Income
Operating Cash Flow
2010A
$442,135,000
$170,077,000
$213,231,000
Covering Analyst: Aaron McGinley
Email: [email protected]
The University of Oregon Investment Group (UOIG) is a student run organization whose purpose is strictly educational.
Member students are not certified or licensed to give investment advice or analyze securities, nor do they purport to be.
Members of UOIG may have clerked, interned or held various employment positions with firms held in UOIG’s portfolio. In
addition, members of UOIG may attempt to obtain employment positions with firms held in UOIG’s portfolio.
university of oregon investment group
http://uoig.uoregon.edu
BUSINESS OVERVIEW
Credit Acceptance Corporation (CACC) was incorporated in 1972 in Southfield, Michigan. The business was
founded by the current Chairman and majority shareholder, Don Foss. Don started selling used cars in Michigan
after he graduated high school and became the world’s largest independent used car dealer in the 1970’s and
1980’s. He realized a significant competitive advantage through a unique financing strategy. CACC was founded
to provide auto loans to consumers regardless of their credit history for the purchase of used cars. The goal of the
business is to enable individuals with less-than-perfect credit histories to purchase a vehicle and establish or
reestablish a positive credit history, thereby moving their financial lives in a positive direction. CACC’s slogan
is, “We change lives!”
From 1972 through early 1989, CACC primarily focused on providing funding, receivables management and
collection services to affiliated dealers, and gradually to unaffiliated dealers, located in the Great Lakes Region.
In 1988 CACC offered an “advance” concept, to lessen the risk for dealers, which allowed for growth in dealers
participating in the program and the dollar amount of loans serviced. By 1991 the company had a nation-wide
growth strategy. In 1992, CACC went public through the Nasdaq followed by a second offering in 1995. By
1996, CACC operated in all 50 states, the U.K., and Canada. However, in 2003 CACC stopped originating
consumer loans in the U.K. and Canada because capital invested in these operations could be redeployed at higher
returns in the United States.
Today, CACC provides auto loans to consumers primarily in the United States. CACC has a Guaranteed Credit
Approval Program providing dealers with the opportunity to deliver credit approvals to consumers within 30
seconds through the internet using a patented Credit Approval Processing System (“CAPS”).
Headquartered in Southfield, Michigan, with additional servicing centers in Southfield and Henderson, Nevada,
CACC is a rapidly growing and progressive Company.
Active Dealer-Partners 12/31/2010
Michigan
7%
New York
6%
Consumer Loan Assignments
12/31/2010
Michigan
10%
New York
9%
Texas
8%
All other
states
71%
Ohio
6%
Mississippi
3%
Texas
6%
All other
states
64%
Ohio
6%
Mississippi
5%
2
The following is a list of subsidiaries owned by CACC, which will be referenced throughout the report.
Arlington Investment Company
Auto Funding America Inc.
Auto Funding America of Nevada Inc.
Auto Lease Services LLC
Automotive Payment Serivces, Inc.
AutoNet Finance Company.com, Inc.
Buyers Vehicle Protection Plan, Inc.
CAC (TCI), Ltd.
CAC International Holdings, LLC
CAC Leasing, Inc.
CAC of Canada Company
CAC Reinsurance, Ltd.
CAC Scotland
CAC Warehouse Funding Corporation II
CAC Warehouse Funding III, LLC
Credit Acceptance Corporation of South Dakota, Inc.
Credit Acceptance Motors, Inc.
Credit Acceptance Corporation of Nevada, Inc.
Credit Acceptance Wholesale Buyers Club, Inc.
Vehicle Remarketing Services, Inc.
VSC Re Company
Credit Acceptance Funding LLC 2007-2
Credit Acceptance Auto Loan Trust 2008-1
BUSINESS AND GROWTH STRATEGIES
CACC’s revenues are derived from two main programs: the Portfolio Program and the Purchase Program. Under
the Portfolio Program, CACC advances money to the dealers-partners in exchange for the right to service the
underlying consumer loan. Under the Purchase Program, CACC buys the consumer loans from the dealer-partner
and keeps all amounts collected from the consumer. As of 3/31/2011 the Portfolio Program and Purchase
Program represented 92.9% and 7.1% of consumer loans, respectively.
Portfolio Program
Under the Portfolio Program as payment for the vehicle, the dealer-partner generally receives a down payment
from the consumer, a non-recourse cash payment (“advance”) from CACC, and after the advance has been
recovered by CACC, the cash from payments made on the consumer loan, net of collection costs and CACC’s
servicing fee (“dealer holdback”), which generally equals 20% of collections.
Purchase Program
Under the Purchase Program dealer-partners receive a one-time payment from CACC at the time of assignment to
purchase the consumer loan instead of a cash advance at the time of assignment and future dealer holdback
payments.
The advance or purchase payment is made based on forecasted future expected cash flows, designed to achieve an
acceptable risk-adjusted return on capital. CACC uses a statistical model to estimate the expected collection rate
for each consumer loan at the time of assignment. The estimates are determined based upon CACC’s proprietary
credit scoring system, CAPS, which considers numerous variables, including credit bureau data, customer data
supplied in the credit application, the structure of the proposed transaction, vehicle data and other factors, to
calculate a composite credit score that corresponds to the expected collection rate.
To mitigate risk of losses, CACC requires dealer-partners to group consumer loans into pools of at least 100
loans. These pools contain loans with similar value and payments. CACC securitizes these pools, creating cross3
collateralized asset-backed securities. By packaging loans together, CACC creates a security with less risk that
pays an annuity. These securities have different risk and return characteristics with different interest, default, and
prepayment rates. Depending on market conditions the asset-backed securities will be kept in house, sold to other
investors, or purchased by CACC. CACC was a pioneer in applying asset-backed securities to auto loans.
Ancillary Products BVPP, GPS-SID, GAP
CACC has ancillary product offerings including Buyer Vehicle Protection Plans (“BVPP”), Global Positioning
Systems with Starter Interrupt Devices marketing (“GPS-SID”), and Guaranteed Asset Protection (“GAP”).
BVPP operates through third party administrators who process claims and underwrite insurance for vehicle
service contracts. A vehicle service contract insures the consumer against damage or mechanical failure of the
vehicle while under credit. CACC receives commission for every vehicle service contract sold to the third party
administrators effective 1/1/10. Vehicle Service Contract Reinsurance (“VSC Re”) is CACC’s subsidiary that
insures vehicle service contracts. Premiums earned on vehicle service contracts are used to fund claims.
GPS-SID marketing is offered to a third party who sells GPS-SIDS.
GAP is a form of insurance marketed by CACC and administered by a third party. GAP pays the difference
between the consumer insurance coverage and the loan balance in the event of a loss of the vehicle. CACC
receives a commission for each contract sold and is not liable for claims.
Revenue
CACC derives its revenue from the following principal sources:
Finance Charges

Portfolio program servicing fees
4

Purchased loan income

Fees earned from vehicle service contracts and GAP

Monthly program fees of $599, charged to
dealer-partners under the portfolio program for
access to CAPS, administration, servicing,
documentation, and collection services, and
property usage
Premiums

Other Revenue Sources 12/31/2010
Income
5%
Premiums
Earned
7%
Premiums earned on the reinsurance of vehicle
service contracts
Other Income
Finance
Charges
88%

Dealer support products and services

Marketing income from dealer-partners

Vehicle service contract and GAP income

Dealer enrollment fees, which is either a one-time fee of $9,850 or an upfront, one-time fee of $1,950 and
forfeited 50% of first dealer holdback payment
Average Consumer Loan Data
As of 12/31/10 the average consumer loan data was as
follows:
Average size of consumer loan: $14,480
Average initial term: 41 months
Average yield on loan: 34.4%
Size of Pool: 100 to 500 loans
Growth Strategy
CACC’s growth strategy is to increase loan performance and unit volume. Loan performance will grow through
internal methods of successfully using CAPS, risk management, and servicing strategies. CACC has always
employed the growth strategy of increasing per loan profitability. Unit volume is a function of dealer-partners
and volume per dealer. Unit volume will grow through active recruitment of dealer-partners and increases in
volume per dealer as the used car industry grows. Management identifies a target market with approximately
55,000 independent automobile dealers that will surpass pre-recession levels of 70,000 dealers over time. Players
in the industry have worked with 15,000 to 20,000 dealers at a time, which management thinks is possible for
5
CACC. CACC has been able to raise the number of active dealer-partners over the last 10 years from 1,180 in
2001 to 3,206 in 2010. CACC plans on expanding its sales force to continue this trend.
Historically, slow growth has been caused by capital constraints. Currently, CACC is well positioned with capital
and management is optimistic about future growth prospects.
MANAGEMENT AND EMPLOYEE RELATIONS
Director and Chairman of the Board: Donald A. Foss, age 66, is the founder and
principle shareholder with approximately 13.9 million shares as of 3/24/2011 (54.4%
of shares outstanding). Mr. Foss served as Chief Executive officer from March 1992
to January 2002.
Chief Executive Officer: Brett A. Roberts, age 44, joined CACC in 1991 as Assistant
Treasurer and has since held several positions within the company including, Vice
President-Finance, Chief Financial Officer, Treasurer, Executive Vice President, CoPresident, Executive Vice President of Finance and Operations, President, and
Director for CACC. He took over as Chief Executive Officer in January 2002 from
Mr. Foss. Mr. Roberts owned approximately 150,000 shares as of 3/24/2011.
Chief Financial Officer: Kenneth S. Booth, age 43, joined CACC in January 2004 as Director of
Internal audit and later worked as Chief Accounting Officer until being named Chief Financial
Officer in December 2004.
Mr. Booth previously worked as a senior manager at
PricewaterhouseCoopers. Mr. Booth owned approximately 14,000 shares as of 3/24/2011.
Executive compensation is designed to attract individuals that will help CACC succeed and align
the interests of executives and shareholders, rewarding outstanding financial performance. Mr. Foss has made
$475,000 a year since 1998. Mr. Roberts makes an $800,000 base salary plus stock options. Mr. Booth makes
about $350,000 plus stock options and bonuses.
Overall, CACC considers its management team to be very strong with low turnover. The senior management
team consists of 22 individuals who average over 11 years of experience with CACC.
CACC strives to be a “great company to work for” and won Crain’s Cool Place to Work Award in 2007.
As of 12/31/2010, CACC had 862 full and part-time employees.
6
Employee Operating Functions 12/31/2010
Support
24%
Originations
28%
Servicing
48%
PORTFOLIO HISTORY
Portfolio
Action
Svigal's
Buy
Date
5/4/2010
Price
45.19
Shares
Svigal's
Sell
8/17/2010
60.62
33
Tall Firs
Buy
5/10/2010
45.05
400
Tall Firs
Sell
4/28/2011
78.19
150
DADCO
Buy
5/27/2010
46.91
80
75
Total
Current Price
Past Realized Gain
Current Unrealized Gain
3389
78.16
0
2000
78.16
509
78.16
0
11728
78.16
3752
78.16
18020
Return
0
0.00%
1384
72.96%
0
0.00%
4971
8277
73.50%
0
2500
66.62%
On 4/30/2010 analyst Adam “the financial stallion” Petranovich pitched a Buy on CACC to the group at the price
of $46.99. Adam valued CACC at $65.50 using a comparables and DCF analysis, a 39.40% undervaluation. The
group voted a Buy on CACC for all portfolios.
On 8/17/2010 Svigal’s portfolio manager Ari Siegel sold 33 shares at a price of $60.62.
On 11/30/2010 analyst Nick Poggi updated CACC and pitched a Hold at the then current price of 59.57. Nick
valued CACC at $68.66 using a comparables and DCF analysis, a 15.26% undervaluation. The group voted a
Hold for all portfolios.
On 4/28/2011 Tall Firs portfolio manager Travis Ostergard sold 150 shares at a price of $78.19.
RECENT NEWS
5/2/11 – “Credit Acceptance Announces First Quarter 2011 Earnings” Global Newswire
CACC announced consolidated net income of $43.2 million, or $1.57 per diluted share, for the three months
ended 3/31/11 compared to consolidated net income of $32.0 million, or $1.01 per diluted share, for the same
period in 2010. Higher revenue from financing products helped beat Wall Street estimates of $1.54 per diluted
share. The stock had fractional gains in after hours trading.
3//11/11 - “Credit Acceptance Corporation Announces Final Results of Its Tender Offer” Global Newswire
7
CACC purchased 1,904,761 shares of outstanding common stock at a price of $65.625 per share, at a total cost of
approximately $125.0 Million. CACC financed the purchase through a combination of the proceeds of a new debt
financing and by borrowing under CACC’s $170.0 million revolving secured line of credit facility.
3/3/11 - “Credit Acceptance Announces Consummation of $100 Million Senior Secured Notes Offering”
GlobeNewswire
CACC consummated the offering of $100 million of its 9.125% first priority senior secured notes due 2017 at an
issue price of 106.0% of the principal amount of the notes. The notes constitute additional securities under an
existing indenture pursuant to which the Company issued $250 million of its 9.125% first priority senior secured
notes due 2017 on 2/1/10.
INDUSTRY
CACC operates in the subprime auto sales financing industry in the United States. The lenders in this industry
provide credit to individuals who do not qualify for traditional financing from banks, credit unions, or other prime
sales financing lenders. Subprime borrowers are made up of persons with tainted or limited credit scores. Credit
scores are based on FICO scores and loan-to-value (LTV) ratios that assess risk associated with lending. Loans
are typically highly collateralized with relatively high interest rates to compensate for increased risk.
The industry is highly competitive served by “buy here pay here” dealership programs, finance affiliates of auto
manufacturers, and independent finance companies. Hundreds of companies serve the market with no single
company having a significant market share. Companies compete on the level of service provided, relationships
with successful used car dealers, and credit ratings.
The key external drivers in the subprime auto finance industry include conditions in the credit markets and
interest rates, the used car market, legislation, unemployment and disposable income.
Credit Markets
Conditions in the credit markets affect how companies finance lending and the level of competition. Companies
raise money in the credit markets through securitization, buying commercial paper, and issuing notes and debt.
When credit markets loosen, the industry faces competition from prime lenders and more subprime lenders enter
the market.
Current credit market conditions are less than ideal in the United States, still recovering from the credit crisis.
Banks are reluctant to lend because of continued economic uncertainty and the European sovereign debt crisis.
Credit markets should loosen as the Banking industry recovers from the recession and grows the size and quality
of loan portfolios.
Interest Rates
Interest rates affect profitability by influencing demand, cost of capital, and charge-off rates. Lower interest rates
increase borrowing demand and decrease costs. Interest expenses are the largest costs associated with auto
lending. Also as interest rates increase, more borrowers may default on their loans, which increases bad debt
expense. According to S&P Net Advantage companies generally borrow at rates between 4% to 9% and lend at
rates between 8% to 20%.
Currently, interest rates are at all-time lows thanks to the Federal Reserve’s QE2. Once this stimulus package
ends in June interest rates should rise. The graph on the left shows the yield on the 10-year Treasury bond. The
graph on the left shows the U.S. Treasury yield curve, which is expected to flatten out.
8
Used Car Market
The used car market has been hit hard by the recession, except the subprime segment, and is expected to grow as
the economy continues to recover. Revenue growth declined dramatically from 2006 to 2011 caused by tight
credit conditions decreased disposable income, and high unemployment. However, the used car industry enjoys
some degree of recession-resistance through subprime sales because good credit candidates have difficulty finding
funding and use subprime borrowing methods. The number of used car dealerships is expected to increase from
119,450 in 2011 to 234,758 in 2016, according to IBISWorld. Historically, the industry has been robust with rare
contractions.
The used car industry is fragmented with the top four firms only controlling 13.6% of revenues. Carmax Inc.
(KMX) has 12.8% market share, which has shown significant growth over the past 10 years. Currently, the used
car market accounts for approximately 34% of all used cars sold in the United States. It is important to note that
used car dealerships compete directly with new car dealerships.
Legislation
Another key external driver of the subprime auto sales financing industry is legislation. State laws generally
regulate sales finance companies through lending consumer protection and licensing. Federal regulation includes
the Truth-in-Lending Act, the Equal Credit Opportunity Act, and the Fair Credit Reporting Act. These laws limit
loan risk, prevent discrimination, and provide transparency through information. The Dodd-Frank Wall Street
Reform and Consumer Protection Act was passed in congress in 2010 to reform financial regulation. As a result,
a Consumer Financial Protection Agency was created to curb abusive financial practices. Although the material
effect of the bill is uncertain, this could directly affect subprime lending practices.
Other Important Drivers
Unemployment, disposable income, and consumer confidence affect consumption, which has a direct affect on
loan performance and unit volume.
9
The subprime auto sales financing industry was hit hard by the recession in 2008 as credit markets clogged,
unemployment was high, and consumer spending died. Many lenders were forced to exit the market. However,
the companies who were able to withstand poor market conditions were rewarded. Low competition allowed for
high returns on capital. As the recession continued in 2009 and 2010, some demand for used cars returned. After
the collapse of the housing market many consumers have been left with bad credit scores, which has resulted in an
increased number of buyers looking for subprime lines of credit.
Going forward, credit markets should loosen, consumers financial situations should improve, and interest rates
will rise. This will translate into an improving used car market yet a more competitive subprime auto sales
financing market.
S.W.O.T. ANALYSIS
Strengths








Proven business model with unchanged core product for 39 years
Unique and valuable product serving a niche market
Strong relationships with dealer-partners
Copyrights, trade secrets, and patents on technology
Well diversified consumer base
Synergistic subsidiaries that are horizontally integrated
Shared risk with dealer-partners
Experienced management team, DPSC, and sales personnel
Weaknesses




Significant long-term debt
An aging majority shareholder and founder, Don Foss
Dependent on the success of dealer-partners
Dealer partner attrition
Opportunities

Rebounding used car market
10

Many consumers with poor credit scores caused by the recession and collapse of the housing market
Threats



State and federal financial regulation overhaul
Increasing competition from used car dealers and used car dealer looking to use in-house financing
Ability to renew credit
PORTER’S 5 FORCES ANALYSIS
Supplier Power There is medium and decreasing supplier power in the industry. Most dealers contract with
finance companies and build long-term relationships.
Barriers to Entry There are low and stable barriers to entry in the industry. However, there are many factors
required to be successful including strong management, ability to price loans and make an acceptable return on
capital, strong sales force and servicers.
Buyer Power There is low and stable buyer power in the industry. Most buyers are considered subprime
borrowers with few credit options.
Threat of Substitutes There is a low and stable threat of substitutes in the industry. Subprime auto financing is
among the only options for subprime consumers looking to purchase a car.
Degree of Rivalry There is high and increasing degree of rivalry in the industry. The market is served by “buy
here pay here” programs, finance affiliates of auto manufacturers, and independent finance companies.
COMPARABLES ANALYSIS
Comparable Companies
CACC considers itself to be a unique business operating in the niche market of subprime lending. Most
comparable businesses are private or incorporated as a subsidiary of a large company. Therefore, out of the few
public comparable companies operating, White River Capital, EZCORP, Nicholas Financial, and World
Acceptance Corporation were chosen to find trading multiples and the implied price of CACC. These companies
were related in terms of risk, growth, business model, capital structure, and other similar characteristics discussed
below.
Metrics Used
Enterprise value metrics were used to represent the value of the companies, taking into account debts.
Specifically, EV/Earnings before Taxes and EV/Operating Cash Flow were used weighted 90% and 10%,
respectively. EV/Earnings before Taxes were weighted heavily, looking at earnings accounting for interest
expense. Interest expense is extremely important for the industry, acting as a sort of proxy for COGS. For this
reason, EV/EBITDA, a standard evaluation metric, was thrown out.
White River Capital Inc. (RVR) – “White River Capital, Inc., a financial services holding company, through its
subsidiaries, engages in specialized indirect auto finance businesses. The
11
company, through Coastal Credit LLC, engages in acquiring and servicing the sub prime auto receivables from
franchised and independent automobile dealers that have entered into contracts with purchasers of used and new
cars, and light trucks. It provides financing programs to customers of automobile dealers, who meet Coastal
Credit’s credit standards, but who may not meet the credit standards of banks and credit unions; and acquires
contracts from dealers for vehicle purchases made by borrowers who have limited or impaired credit histories or
who are purchasing older model and higher mileage automobiles. The company, through Union Acceptance
Company LLC, holds and oversees its portfolio of non-prime auto receivables. White River Capital, Inc. was
founded in 2004 and is headquartered in Rancho Santa Fe, California.” –Yahoo Finance
RVR was given a 20% weighting. RVR operates in the same market, has the same subprime sales financing
business model, and has a similar capital structure. However, CACC operates on a much larger scale and is
primed for more growth.
EZCORP Inc. (EZPW) – “EZCORP, Inc., together with its subsidiaries, lends or provides credit services to
individuals to meet their short-term cash needs. It offers pawn loans, which
are non recourse loans collateralized by tangible personal property, including
jewelry, consumer electronics, tools, sporting goods, and musical instruments.
The company also provides signature loans consisting of payday loans,
installment loans, auto title loans, or fee-based credit services to customers seeking loans. In addition, EZCORP
provides credit services, including advice and assistance to customers in obtaining loans from unaffiliated lenders.
As of September 30, 2009, it operated a total of 910 locations consisting of 369 the U.S. pawnshops, 62
pawnshops in Mexico, 477 the U.S. short-term loan stores, and 2 short-term loan stores in Canada. The company
was founded in 1989 and is headquartered in Austin, Texas.” –Yahoo Finance
EZPW was given a 30% weighting. EZPW and CACC have similar business models, offering subprime loans
with high interest rates. The companies are roughly the same size and have similar margins. Both companies use
significant long-term debt to finance operations through revolving credit facilities subject to changes in the
Eurodollar rate. Although their credit programs are different, EZPW and CACC should experience similar
growth in demand.
Nicholas Financial Inc. (NICK) – “Nicholas Financial, Inc., through its subsidiaries, operates as a specialized
consumer finance company. The company engages in acquiring and servicing contracts for
purchases of new and used automobiles and light trucks. It also makes direct loans and sells
consumer-finance related products. In addition, the company engages in developing, marketing,
supporting, and updating industry-specific computer application software for small businesses
located primarily in the Southeast United States. As of April 5, 2011, it operated 56 branch
locations in 14 Southeastern and Midwestern states. The company was founded in 1986 and is
headquartered in Clearwater, Florida.” –Yahoo Finance
NICK was given a 20% weighting. NICK and CACC have similar business models, as finance activities account
for the majority of NICK’s revenue. NICK primarily operates in many of the same states as CACC. The
companies’ capital structures are comparable, depending on long-term debt. Furthermore, both companies have
seen solid growth through the recession and should continue to grow in line with each other in the future.
Management has identified comparable growth strategies.
12
World Acceptance Corporation (WRLD) – “World Acceptance Corporation engages in small-loan consumer
finance business. It offers short-term small loans, medium-term
larger loans, related credit insurance, and ancillary products and
services, as well as loans standardized by amount and maturity.
The company also provides income tax return preparation services and access to refund anticipation loans. In
addition, it markets and sells credit life, credit accident and health, credit property, and unemployment insurance
products; markets automobile club memberships to its borrowers; and reinsures credit insurance. Further, the
company, through its subsidiary, ParaData Financial Systems, offers data processing systems; and markets
computer software and related services to financial services companies. It serves individuals with limited access
to consumer credit from banks, savings and loans, other consumer finance businesses, and credit card lenders. As
of March 31, 2010, the company had 1,034 offices in South Carolina, Georgia, Texas, Oklahoma, Louisiana,
Tennessee, Illinois, Missouri, New Mexico, Kentucky, Alabama, and Mexico. World Acceptance Corporation
was founded in 1962 and is headquartered in Greenville, South Carolina.” –Yahoo Finance
WRLD was given a 30% weighting. WRLD’s product offerings are very comparable to CACC’s, servicing
subprime loans and ancillary insurance products. WRLD has seen solid growth coming out of the recession and
should continue to grow similarly to CACC. Operating in the subprime segment, in many of the southern states
where CACC operates, exposes WRLD to similar risk. Both capital structures use significant long-term debt
subject to changes in the Libor rate.
DISCOUNTED CASH FLOW ANALYSIS
Revenues
As discussed in the Business and Growth Strategies section, CACC derives revenues from three primary sources
including, finance charges, premiums, and other income. Finance charges represent CACC’s core business and
make up approximately 88% of total revenues. Premiums and other income make up approximately 7% and 5%,
respectively.
The revenue model built to project future revenue derives finance charges and trends premiums and other income.
Finance charges come from the number of loans serviced and profitability per loan. The number of loans serviced
is a function of active dealer-partners and volume per dealer-partner. The majority of growth depicted in
historical revenue comes from growth in active dealer-partners, which is therefore the most important line item to
project. To project active dealer-partners, management’s target market of independent and franchised dealerships
and market share was used. To determine profitability per loan, an average was derived and projected. Premiums
and other income were kept consistent as a percent of total revenue, derived from finance charges.
Going forward, total revenue should go from 442M in 2010 to 850M+ in 2020. Year over year growth should
decelerate over the next couple of years, continue to grow at about 5% until 2016, and then pick up speed as the
U.S. economy’s growth accelerates. In the terminal year 2020 revenue will stay around 7% into perpetuity.
CACC’s target market took a hit in the recession dropping from 70,000 dealerships to 50,000 dealerships, while
their market share increased due to a favorable competitive environment. The target market will grow at a rate of
about 5% into perpetuity, while market share decreases due to competition entering the market and an inability to
keep up with the growing target market. Profitability per loan will decrease slightly as management has stated the
current return on capital is unsustainable due to competition reentering the market. Volume per dealer-partner
13
should increase as dealers sell more cars and the market grows. Therefore, CACC should see solid top-line
growth going forward but will not be able to continue the incredible growth seen prior to and through the
recession due to the competitive environment.
Operating Expenses
Operating expenses were projected using the percent of revenue method. Salaries and wages and sales and
marketing will increase because CACC competes on the quality of service and sales personnel, which will need to
improve to stay competitive. Revenue will outpace sales and marketing starting in 2015. General and
administrative will decrease slightly through economies of scale. Provisions for credit losses will return to prerecession levels over the course of the next 5 years and then decrease as the economy does better. Provisions for
claims will increase fractionally as more customers take advantage of vehicle service contracts, and then will
decrease as CACC improves the business segment.
Interest Expense
Interest expense was projected using the percent of revenue method. Interest expense will increase because
interest rates will rise in the U.S. and abroad, as the global economy improves. CACC monitors the interest rate
environment closely and employs strategies to hedge against rising rates. Hedging instruments used include
interest rate caps and interest rate swaps. However, even with these strategies in place CACC is still exposed to
risks associated with interest rates. In addition, CACC plans on expanding the use of long-term debt.
Depreciation and Amortization and Capital Expenditures
Depreciation and Amortization were projected using the percent of revenue method. D&A will continue to be at
the relatively insignificant 2% level since capital expenditures will continue to stay at a modest 1%. Historically,
D&A has been greater than capital expenditures. CACC continues to upgrade servicing software consisting of
household technology. This investment in technology will support operating efficiency and continued access to
funding and liquidity sources.
Net Working Capital
Net Working Capital was project using the percent of revenue method. Net working capital was kept within the
historical range and doubled checked with a current ratio. Cash and cash equivalents consist of short term
securities, which should stay constant in the future. Restricted cash and cash equivalents consist of assets held in
trusts associated with secured financing and vehicle service contract claims, which should increase over time as a
percent of revenue as secured financing increases and more vehicle service contracts are sold. Restricted
securities available for sale consist of highly liquid fixed income securities, which should stay constant in the
future. Loans receivable was projected using a percent of revenue method and double checked with a loans
receivable turnover ratio (Net Credit Sales/Average Accounts Receivable). Loans receivable will decline
modestly as a percent of revenue and increase as a loans receivable turnover ratio, representing increased
efficiencies in collections as time goes on. Accounts payable and accrued liabilities will increase due to increases
in unearned premiums and claim reserves.
14
Beta
The proxy for Beta was chosen to be .84 based on an 18 year (CACC’s inception date) monthly regression against
the S&P 500. This was the highest Beta found after running multiple regressions and was chosen to be
conservatively accurate. Please see other results below.
CACC
1-year
2-year
3-year
5-year
10-year
18-year
Weekly
0.71
0.76
0.66
0.78
0.81
0.80
Monthly
0.35
-0.03
0.32
0.51
0.79
0.84
Hamada and Vasicek methods were considered but ultimately thrown out due to an inappropriate peer group.
Cost of Debt
Cost of debt is 7% based on CACC’s most recent quarterly filing with the SEC. Senior Vice President and
Treasurer, Doug Busk, also confirmed this cost in a recent conference call. CACC has a B1 credit rating, rated by
Moody’s.
RECOMMENDATION
CACC is overvalued and should be sold in all portfolios.
CACC’s business is designed to be recession resistant, thriving in poor credit market conditions. Through the
most recent recession CACC faired extremely well and has taken advantage of the increased number of
consumers with damaged credit scores. An increase in demand for CACC’s product, combined with a favorable
competitive environment has allowed CACC’s profits to accelerate through double digit growth year over year for
the past half-decade. CACC is operating in very ideal conditions, provided its business model. The stock has
seen nice returns and is currently at all-time highs.
Over the next 5 years and onward, CACC will not be able to sustain the growth it has seen. Competition is a
looming threat as the economy recovers, prime sales financing will begin to eat away at demand, combined with
rising interest rates means CACC’s profits will get squeezed. In addition, the regulatory environment in the US is
not looking favorable for subprime going forward. Overall growth will be modest driven by a growing used car
market and aggressive sales strategies.
15
Based on a comparables and DCF analysis CACC’s implied price is $70.81, a 9.4% overvaluation at the current
price of 78.16. CACC is currently held in all portfolios and should be sold in all portfolios.
16
APPENDIX 1 – COMPARABLES ANALYSIS
17
APPENDIX 2 – DISCOUNTED CASH FLOWS ANALYSIS
18
APPENDIX 3 – DISCOUNTED CASH FLOWS ANALYSIS ASSUMPTIONS
APPENDIX 4 – BETA SENSITIVITY ANALYSIS
19
APPENDIX 5 – REVENUE MODEL & WORKING CAPITAL MODEL
20
APPENDIX 6 – SOURCES










Credit Acceptance Corporation, Nicholas Financial, White River Capital, EZCORP, World Acceptance Corporation Company Website
Charles Schwab Research
FactSet Financial Research
IBISWorld
J.P. Morgan Research
National Auto Dealers’ Association
National Independent Auto Dealers’ Association
S&P Net Advantage
usedcarnews.com
Yahoo Finance
21

Credit Acceptance Corporation - University of Oregon Investment

Transcription

Similar documents

the government mobile communications project

See PDF

Credit Acceptance Corporation - University of Oregon Investment

2008-2009 Program Catalog - Capital Area Career Center

HNSA thanks Ed Zajkowski for his generous loan of the original

Mortgage Services

March 2016 - Calvary Armenian Congregational Church

Powerone FCU News - Power One Federal Credit Union

Summer - Augusta VAH Federal Credit Union

Winter 2015

June 2016 - State Highway Patrol Federal Credit Union

Our 2015 Annual Report is now available

Summer 2015 Augusta VAH - Augusta VAH Federal Credit Union