THE HEDGEYE EDGE
Credit Acceptance Corp (CACC) is currently among the most reviled companies in the financials space, with both a decimated buy-side and sell-side sentiment, partly attributable to a regulatory activist short thesis floated publicly over the course of the last year.
Having admittedly embarked on our study of CACC with a largely negative bias, our findings, much to our surprise, emerged as a strong refutation of the dominant, heavily agreed upon short view of this company. The institutional community should at least reconsider the case for a short. According to our Financials Sentiment Monitor, CACC registers as a "5,” the third worst sentiment score out of 57 companies in the Specialty Finance subsector.
The street’s expectations for 2018-2020 are modest. Earnings power is on track to beat expectations over the next 12-18 months, with a current run-rate of $25 and estimates of $26, $28, and $29 for 2018, 2019, and 2020, respectively. Add in unaccounted sales force growth of 30% from mid-2016 to 3Q2017, and we think this high short interest name may find itself at risk for a short squeeze.
The all-weather success of the firm is rooted in its lending formula capable of robustly servicing the credit needs of deep subprime auto buyers across economic cycles. Publicly traded since 1992, the only unprofitable year in the firm’s history was 1999. Moreover, GAAP EPS grew +23% and +113% Y/Y in 2008 and 2009, respectively.
Detailed vintage-level analysis reveals that the firm truly has turned deep subprime auto-lending into a consistently profitable science, and that concerns over the performance of its most recent vintages, amid increasing competitive and economic pressures, are not presently justified. Fundamental downside risk appears low even in adverse economic scenarios, although shares could still likely be weak for a period.
Further, management consists of great operators and seasoned veterans. CACC’s 28-member management team, averaging 15 years of experience/person, has proven to be good stewards of capital. The firm possess the ability to buy back stock in the event of downward movement. Management has bought back roughly half of the company's stock going back to 2001. In addition, incentive compensation is aligned with shareholders determined by economic profit: earnings produced in excess of the imputed cost of capital.
In sum, CACC’s management is a tried, tested, and proven asset to the firm. We see 15-20% upside in our base case and a bull case implying 30%+ upside.