Credit Acceptance Corp Analysis – Excellent Operators and Allocators for a Great Compounder Explained

Credit Acceptance analysis
Credit Acceptance Corp. logo
  • Credit Acceptance Corp has proven to be disciplined loan underwriters, a prerequisite for good long-term performance.
  • Has a clear and rational strategy for allocating capital.
  • Owner-operated, meaning management has the same skin in the game as outside shareholders.
  • Their business model sets them apart and might turn out to be countercyclical in a recession.
  • However, the industry is competitive and the runway seems to decrease.

Introduction and summary:

Credit Acceptance Corporation (ticker code: CACC) is an owner-operated auto lender in the subprime loan segment. The business model is reasonably easy to understand and pretty straightforward: to lend and service auto loans to subprime borrowers via auto dealers. However, the loan assignments are structured so that all parties (lender, dealer and buyer) have a common interest in servicing the loan to avoid a default.

Management, the founding family and the board owns almost 50% of the company, making the company “owner-operated” and thus aligning the interest with outside shareholders. The company is managed well, but the industry is not the most desirable and the runway is decreasing.

One often neglected aspect of a stock’s return is how and where the management and board allocate the capital. Credit Acceptance does not pay a dividend but returns surplus capital via buybacks when they believe the price is not reflecting intrinsic value. The buybacks have returned over 20% annual returns since the program was initiated in 1999.

The article explains how a loan assignment is given, looks at operational metrics, share price history, capital allocation, management, loan performance, the negatives, the runway and valuation:

The Business:

The founder, Don Foss, set up Credit Acceptance (abbreviated CAC) back in 1972 with the aim to make a profitable auto lending company that has a clear vision of serving customers that otherwise would be cut off from financing. His mission was to make subprime borrowers eligible for auto loans and help them land a job or keep their job. Unlike most of Europe, a car is much more of a necessity in the US in order to have or keep a job.

The customers typically consist of individuals who have been turned away by other lenders, thus offering them a chance to establish or re-establish a positive credit history. The focus is on subprime loans on cars that are sometimes very old (7 years or older) and has high mileage on the meter. To compensate for the risk of defaults the interest rates are high, mostly around 24%.

To make sure both the dealer and CAC have the same interests, 83% of the loans since 2005 are labeled as “Portfolio program”: when a loan is originated (the dealer sells a car) the dealer receives a payment from CAC, in addition to the down payment from the buyer, whereby the dealer makes an immediate profit on the deal. When the advance from CAC has been recovered/repaid, the majority of the loan payments go to the dealer, less collection costs and a servicing fee to CAC. The dealer has thus an incentive to make sure the borrower does not default by offering a car that will outlast the life of the loan. Obviously, CAC does not know the condition of the car, but the dealer does.

The whole idea behind CAC is to create a situation where all parties benefit: the dealer might make a deal he otherwise couldn’t do, the buyer hopefully buys an old affordable car that is not a wreck, and finally CAC services profitably a buyer that other lenders have most likely turned down.

In practice it works like this:

A dealer buys a car for 10 000 and puts it for sale for 15 000. A buyer wants the car but can only afford to pay 14 000 with a down payment of 3 000, thus in need of 11 000 financings. The loan terms might be 60 months and 23% interest, which means total payments of 18 606 over the five-year terms (assuming an annuity loan of 310 a month). The interest is high to compensate for the risk and allow a margin of safety (on average only 69% of the loan is paid back by the borrower) considering that most likely the borrower does not have many options for borrowing. On assignment, CAC is contractually owed 18 606, and an advance payment of 8 373 is paid to the dealer. The advance equals 45% of the total expected payments from the borrower, 45% being the average advance to the dealers over the last 10 years for any type of loan (according to the numbers from Q4 2018). The dealer fetches 8 373 plus 3 000, in total 11 373, and makes an immediate profit of 1 373 dollars. This might be lower than the dealer otherwise could have fetched, but the inventory is reduced and they might receive more in profits later if the buyer does not default.

From then on CAC takes a 20% servicing fee on the monthly payments from the buyer until the advance is recouped, while later payments are split 80% to the dealer and 20% to CAC. The 80/20 split is a strong incentive for the dealer to sell a car that can outlast the life of the loan as most of the profits are made after CAC has been repaid. The better car that is sold and the better payer the borrower, the more profit for the dealer.

The margin of safety for CAC is the difference between the advance (45%) and the amount of the loan forecasted to be paid back:

    As of December 31, 2019
Consumer Loan Assignment Year   Forecasted Collection %   Advance %   Spread %   % of Forecast Realized
2009   79.6 %   43.9 %   35.7 %   99.9 %
2010   77.8 %   44.7 %   33.1 %   99.8 %
2011   74.8 %   45.5 %   29.3 %   99.6 %
2012   73.9 %   46.3 %   27.6 %   99.3 %
2013   73.5 %   47.6 %   25.9 %   98.8 %
2014   71.7 %   47.7 %   24.0 %   98.0 %
2015   65.4 %   44.5 %   20.9 %   94.5 %
2016   64.1 %   43.8 %   20.3 %   84.8 %
2017   64.8 %   43.2 %   21.6 %   68.8 %
2018   65.1 %   43.5 %   21.6 %   44.9 %
2019 (3)   64.6 %   44.0 %   20.6 %   15.4 %

Source: Q4 2019.

The portfolio program has been in place since the 80s and is CAC’s preferred method because it offers some kind of protection if the initially forecasted collections are lower than initially estimated. The other type of loan CAC offers, “purchase loans”, is the traditional auto financing where the dealer receives a payment in exchange for making a loan from CAC. In this program, the dealer doesn’t have any incentives tied to the loan.

Any dealer that uses CAC knows they can service any customer that enters the shop (CAC accepts more or less 100% of the applicants) because CAC is probably some sort of “lender of last resort”. Furthermore, the dealer gets access to CAPS (Credit Approval Processing System), CAC’s own proprietary software for estimating the profits on a loan. The software enables the dealer to compare their inventory for profits on their vehicles by using different loan terms. In literally seconds the dealer can calculate the potential profits for all vehicles.

The business model clearly differs from a “normal” used car dealership. In most cases the dealer is done and finished after a contract is assigned on behalf of the lender, obviously leaving the dealer with no incentives to offer a good car to the buyer. Such a deal is commodity-like and the intense competition leaves lenders underbidding each other.

CAC doesn’t write much about the default rate. Management said it was 35% in an earnings call some years back.

I believe the main reasons for defaulting is either a severe mechanical breakdown or unemployment. Most cars financed by CAC have close to 100 000 miles on the meter, and mechanical breakdowns should not come as a surprise, no matter how aligned interests are. Most dealers (including CAC) implement a service contract as part of the deal, and this puts financial constraints on the buyer.

Company And Stock Performance:

CAC’s business model has created spectacular wealth for the shareholders:

Since x year until today: CAGR:
From January 1994 14.8%
From January 2000 24%
From January 2005 21.1%
From January 2010 23.4%
From January 2015 22.4%

CAC went public in 1992, and since 1994 the five-year rolling CAGR has been like this:

Credit Acceptance share price performance
Credit Acceptance Corp. share price and rolling five-year CAGR. The blue line is the share price, logarithmic scale (left). The pink line is the 5-year rolling CAGR (right scale). Source: Yahoo!finance and my own calculations.

Compared to the S&P 500 (SPY) CAC has outperformed massively after the GFC in 2008/09:

Credit Acceptance vs S&P 500
Credit Acceptance Corp. vs. S&P 500. The blue line is CAC and the pink line is SPY (reinvested dividends), 10 000 invested in 1994. Logarithmic scale. Source: Yahoo!finance and my own calculations.

The performance was pretty bad at the end of the 90s and the beginning of the new millennia. The reason was poor profitability and increased competition, resulting in a big charge in 1997 and 1999 and a complete makeover of their software. Debt covenants to lenders were violated, management had to beg for mercy, and this humbling experience meant management later always aim for a wide margin of safety both in loan assignments and debt covenants. They seem to have learned from this expensive lesson.

CAC reports both GAAP and adjusted earnings because GAAP understates net income in the current period while overstating future periods.

The graph below shows the reason for the solid share performance:

Credit Acceptance eps growth
Credit Acceptance Corp: Earnings per share and three-year rolling CAGR of EPS. The right axis is the three-year rolling CAGR. The blue bar is GAAP and the red is adjusted earnings. Source: Annual reports.

CAGR of EPS since 2005 is 21.5%, in complete tandem with the share price.

The return on equity has thus been phenomenal: over 25% since 2010. However, right now the stock is trading at 3.2 times the equity, thus you invest at only 8% ROE.


CAC is a rare company with a pretty valuable shareholder letter. The CEO goes to length to inform the reader of the history, how they implement their long-term focus and the strengths and weaknesses of both their business model and the market in general. I encourage the reader to read their latest letter. For investors like me, who have no opportunity to meet management face to face, an informative shareholder letter gives investors a good clue about the competence of the management.

CAC is focused on long-term value and not busy pleasing short-term shareholders. They understand the benefits of having an investor base that thinks long-term, although in less similar ways like Amazon (AMZN) and Berkshire (BRK.B), and investors know what to expect from the business. As a matter of fact, management has learned from the shareholders as the capital returned to shareholders is a direct result of interacting with two of them (Tom Tryforos is one of them, see more on capital allocation below).

Since the problematic years at the end of the ’90s, the focus is on profitability, not growth. They back away from underwriting unprofitable loans and all growth is organic, and therefore no risk for ill-fated M&As.

Management acknowledges that culture is a strong driver for competitive advantages. In 2001, they set two goals: to reach a stock price of 100 by 2014 and be named in Fortune 100 Best Companies to Work For. The first goal was reached in 2012, and the latter in 2014 and for consecutive six years after that. These two goals are not independent of each other, I believe, quite the contrary.

I believe owner-operated management is an underrated factor in investing. Inside ownership in CAC is significant: According to the proxy statement for 2019, all executives and board members own 5% of the shares. The CEO, Brett Roberts, owns 2.4% and has been employed in the company for decades. Don Foss, who stepped down as chairman in 2017, and his wife own almost 25%. Furthermore, another investor who has been invested for over two decades (and sits on the board), owns about 16%.

Capital Allocation:

The main priority is to reinvest in the business to fund new loan assignments. Management calculates a variable they call “economic profit” which is used for management compensation and evaluation of financial results, as explained in detail in the shareholder letter. Economic profit has only been negative in 2001 and 2002 and since then returned a solid spread:

Credit Acceptance capital allocation
Credit Acceptance Corp: return on invested capital subtracted cost of capital. Source: Annual report 2018.
Credit Acceptance operating earnings
Credit Acceptance Corp: net income subtracted cost. Source: Annual report 2018.

Any excess capital is returned to shareholders solely via buybacks. Unlike many other companies, who mostly return capital back to shareholders without giving any specific reasoning behind their actions, CAC provides a discussion of when they return capital, why buybacks are preferred to dividends and when it makes sense to buy back shares (below intrinsic value). The calculation of intrinsic value is done in tandem by management and two board members.

I quote from their shareholder letter:

We have used excess capital to repurchase shares when prices are at or below our estimate of intrinsic value (which is the discounted value of future cash flows). As long as the share price is at or below intrinsic value, we prefer share repurchases to dividends for several reasons. First, repurchasing shares below intrinsic value increases the value of the remaining shares. Second, distributing capital to shareholders through a share repurchase gives shareholders the option to defer taxes by electing not to sell any of their holdings. A dividend does not allow shareholders to defer taxes in this manner. Finally, repurchasing shares enables shareholders to increase their ownership, receive cash or do both based on their individual circumstances and view of the value of a Credit Acceptance share. (They do both if the proportion of shares they sell is smaller than the ownership stake they gain through the repurchase.) A dividend does not provide similar flexibility.

The buyback program started in 1999 and since then 34 million shares are bought back, reducing the outstanding shares to only 18.8 million as of today. The buybacks have been a huge contributor to the growth in EPS. For example, the 3.8 million shares purchased in 1999 and 2000 at an average price of 5.24 have compounded at a CAGR of 23%. Not bad!

It’s also worth noting that the management tries to avoid diversification, often done in a value-destructing way, to keep focusing where capital is of best use. For example, in 2006, the company decided to exit the UK and Canada after concluding that the capital invested in both countries could be redeployed at a higher rate of return on home turf.

Loan Performance:

At the end of the day, the biggest risk is probably loan defaults, as should be pretty obvious for a lender. However, looking at the history, CAC has turned out to make very good forecasts of expected payments and defaults. Even during the crisis of 2008/09 management overestimated loan losses. It seems the largest forecasting errors have been too pessimistic, not too optimistic as is usually the case in most forecasts, whatever business or profession.

When a loan is assigned, CAC makes an estimate on the expected collection based on their scorecards and data: macro, vehicle, dealer and loan data. These data are used to calculate the advance to the dealer at a price maximizing the economic profit (explained above). The collection rate is continually evaluated against the initial forecast throughout the life of the loan, obviously becoming more accurate as the loan ages.

The table below summarizes their statistics:

Credit Acceptance loan performance
Credit Acceptance Corp: collection rates vs. initial forecast. Source: Annual report 2018.

Nevertheless, forecasts are just estimations with a certain degree of uncertainty, and this is why CAC estimates a high margin of safety: the margin on each loan is estimated at a huge profit compared to the cost of capital.  Management is confident CAC will do relatively good in an economic downturn because competitors are more leveraged and have lower profitability per loan, making them fragile and vulnerable (to borrow a term from Nassim Nicholas Taleb). CAC has increased the funding options to ensure they have enough capital should markets dry up as they did in 2008/09. Management says this reduces short-term profitability but should provide both a buffer and an advantage in distressed times thus giving a long-term edge over the competitors.

What Sets Credit Acceptance Apart?

Auto financing is very competitive, cyclical and fragmented: banks (which have lower funding costs than CAC), car dealers (like CarMax (KMX), for example), credit unions and smaller specific auto lenders. It’s difficult to obtain any competitive advantages, and the business cycle creates a great deal of stress and havoc at intervals due to the use of leverage to boost returns.

The first strength of CAC, as already mentioned, is making an immediate profit for the dealer when assigning the loan. CAC sets itself apart by not dealing directly with the borrower but letting the car dealer have full discretion on whether or not to lend. Second, operations are efficient with a low turnover of the workforce. Third, their software and models enable them to forecast the profitability with reasonable accuracy. Fourth, management has proven themselves as disciplined underwriters and stay away if a margin of safety is too small. Fifth, 43% of the workforce works directly with the loan portfolio, according to the annual report. Sixth, CAC offers just one product, and their only aim is to make this product the most profitable as possible. Loan applications are fully automated and take just seconds to approve. Finally, management reckons their culture/people are their best asset.

Due to what happened in the late 90s and the GFC, management wants to play “safe” with low leverage. Currently, the leverage is around twice shareholder’s equity, but borrowing facilities are in place in case of a cyclical downturn. Because CAC has a high return on equity and assets, they can operate with less leverage and potentially “squeeze” competitors when a recession hits, making CAC gain if a crisis makes capital exit the industry.

The most interesting aspect of CAC is that in a recession their margin of safety might increase. The spread between the collections and dealer advances was higher in 2009-2012 than later in the more competitive cycle. Assuming the management has not loosened their underwriting discipline, I expect to see the same in the next recession.

In addition, the behavior of borrowers indicates they are less likely to stop servicing their auto loans than other loans. They simply don’t walk away from their car unless they have to as they need it for their monthly paycheck.

Future Growth:

Management is quite frank in explaining the difficulties of maintaining current growth:

  • A larger capital base makes it harder to grow.
  • Due to the current very competitive market, the potential profit by pricing loans more aggressively is lower than it was some years ago.
  • The number of dealers is not infinite.
  • The number of loans per dealer is going down.
  • The auto industry is getting less and less fragmented.

Management expects lower growth in new dealers to continue, and more focus is spent on potential gains from daily efforts to improve their product and culture.

Credit Acceptance active dealers
Credit Acceptance Corp: Active dealers and unit volume per dealer. Source: Annual report 2018.

For 2019 the numbers were like this, according to the 4Q 2019 report:

  2019 2018
Consumer unit loan volume 369 805 373 329
Active dealers 13 399 12 528
Avg. volume per active dealer 27.6 29.8

The average volume per active dealer continued to fall, but the dollar amount advanced to dealers increased because of higher prices on sold cars. Furthermore, the average loan amount has doubled over the last decade, while the average term of the loan has increased from 38 to 58 months (this explains the increase in advances to dealers).

In a move to attract more dealers CAC eliminated its 9 850 USD enrollment fee in August 2019 (alternatively the dealer could accept an accelerated dealer holdback – also eliminated). Despite this initiative, the enrollment of dealers is slowing down.


Obviously, subprime lending comes with a lot of negativity due to the high default rates and claims of “predatory” practices. For example, some practice by hiding charges, or simply showing monthly payments for the car instead of the actual price of the car, meaning the buyer does not know what he is paying for the car vs the loan. I think it’s safe to say the industry has a bad standing, and certainly after 2008/09, for right or wrong reasons. Nevertheless, subprime in itself might be neither bad nor immoral, it depends more on the lending practices and competitive forces in the marketplace.

Subprime is exposed to scrutiny from regulators, resulting in compliance costs. However, if this is the case, it favors the best capitalized and profitable operators, which I believe CAC is. Less profitable operators will fare much worse because regulation, despite its intentions, limits competition.

New Accounting Standards:

From 2020 CAC needs to implement a new accounting standard called current expected credit losses (CECL), a requirement for most financial institutions. In short, this means CAC needs to set aside future loan reserves on assignments, obviously impacting earnings and volatility in future earnings. However, future cash flows will remain the same.

Market Perceptions:

Without doing any quantitative research (my gut feeling and from what I have read) it seems like most sell-side analysts are quite bearish due to increased competition and greater risk in the loan portfolio. However, I would not put much weight on them due to their short-term nature.


Despite its profitability, CAC has always traded at a steep discount to the market, like most financial stocks after GFC of 2008/09: the P/E range has been between 10 and 15. The latest GAAP EPS, 34.57, indicates a current PE of 12, which is about their average over the last decade. Thus it seems fairly valued.


I believe CAC is an excellent operator and allocator, as evidenced by the financial results over the last 20 years (after they took a beating and learned at the end of the 90s). If they operated in another industry, the multiples would be much higher.

In my opinion, even with conservative estimates, a lot must go wrong for CAC not to be a reasonably good future long-term investment. At 12% EPS growth and multiple contraction to 10, CAC returns 10% annually over the next decade (for comparison the three-year rolling CAGR of EPS is 28% as of today). Management has been around for a long time, and nothing indicates their underwriting discipline has worsened, even considering the reduced margin after the best years of 2009-2012. However, the runway is getting shorter and future growth seems likely to decrease.

I’m currently not long.

Disclosure: I am not a financial advisor. Please do your own due diligence and investment research or consult a financial professional. All articles are my opinion – they are not suggestions to buy or sell any securities.


– How does Credit Acceptance Corporation ensure dealer and lender alignment?

Credit Acceptance Corporation offers a “Portfolio program” where the dealer receives an immediate profit when they originate a loan. This aligns their interests with the lender in ensuring loan performance.

– What is Credit Acceptance Corporation’s approach to capital allocation?

Credit Acceptance Corporation does not pay dividends but returns surplus capital to shareholders through share buybacks when they believe the stock price is undervalued.

– How does Credit Acceptance Corporation assess loan performance and defaults?

Credit Acceptance Corporation uses scorecards and data to estimate expected collections and default rates when assigning loans. These estimates are continually evaluated and have historically been conservative.

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