Rise in Active Dealers Aids Credit Acceptance (CACC), Costs Ail
Credit Acceptance Corporation CACC is expected to keep witnessing top-line growth, supported by decent demand for auto loans, along with an increase in dealer enrollments and active dealers. The company’s share buyback policy also seems impressive.
However, elevated expenses will likely hurt the company’s bottom-line growth. Weak credit quality, supply-chain disruptions in the automobile industry and high debt levels are other concerns.
The Zacks Consensus Estimate for CACC’s 2023 earnings has been revised 14.6% lower over the past 30 days. Hence, CACC currently carries a Zacks Rank #3 (Hold).
Over the past six months, shares of Credit Acceptance have gained 1.5% against the 7.7% decline of the industry it belongs to.
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Looking at its fundamentals, Credit Acceptance’s revenues witnessed a six-year (2016-2022) compound annual growth rate (CAGR) of 11.2%. The momentum persisted in the first six months of 2023. Growth is primarily attributable to a steady rise in finance charges, which is also the main revenue component (accounting for 92.5% of total revenues in the first half of 2023).
While finance charges are likely to witness headwinds from macroeconomic factors in the near term, the same will rebound once the operating backdrop improves. A decent rise in dealer enrolments and active dealers is also expected to support the company’s top-line growth. We anticipate total revenues (GAAP) to rise 3.5% this year.
As of Jun 30, 2023, Credit Acceptance had a total debt of $4.57 billion, significantly higher than cash and cash equivalents (including restricted cash and restricted securities) of $493.4 million. Nevertheless, the company has a revolving secured line of credit facility and some Warehouse facilities, which reflect that its current liquidity position is sufficient to meet near-term debt obligations, even if the economic situation worsens.
Further, Credit Acceptance believes in returning capital to shareholders through stock repurchases instead of paying dividends. In September 2021, it authorized an additional 2 million shares to be repurchased. As of Jun 30, 2023, the company had 0.15 million shares left to be repurchased. Given the deteriorating macroeconomic backdrop, it is prioritizing maintaining capital levels over buybacks. Despite having a substantial debt burden, its high cash flow generating business model and low capital expenditure are likely to help sustain share buybacks.
However, operating expenses witnessed a CAGR of 10% over the last four years (2018-2022), with the uptrend persisting in the first half of 2023. The increase was mainly due to a rise in salaries and wages, and sales and marketing expenses. Operating expenses are expected to remain elevated in the near term, owing to the company’s continued efforts to hire additional team members and sales force.
Credit Acceptance’s asset quality has been deteriorating over the past few years. While provision for credit losses declined in 2018 and 2021, the same witnessed a substantial rise in 2020 on account of the coronavirus-related concerns. The upward trend persisted in 2022 and the first half of 2023. Given the steady rise in loan balances and deteriorating macroeconomic outlook, provisions are expected to remain elevated in the near term. Our estimates for provisions for credit losses indicate a rise of 46.4% for 2023.
Stocks to Consider
A couple of better-ranked stocks from the finance space are SEI Investments Company SEIC and Moody's Corporation MCO. SEIC and MCO currently carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The consensus estimate for SEIC’s current-year earnings has been revised 3.8% upward over the past 60 days. Over the past three months, SEIC’s share price has gained 4.4%.
Moody’s current-year earnings estimates have been revised 2.7% upward over the past 60 days. MCO’s shares have gained 5.5% over the past three months.
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