CACC

Publicly traded companies mentioned herein: America's Car-Mart, Inc. (CRMT), Avis Budget Group Inc (CAR), CarMax Inc (KMX), Credit Acceptance Corp (CACC)

Highlights

The presenter is short shares of Credit Acceptance Corp (CACC) at $190 and sees meaningful downside risk for the subprime auto lender. In his opinion, not only is CACC’s accounting aggressive, but the timing of founder Donald Foss’ retirement (January 2017) and recent stock sales are noteworthy. Additionally, shares are expensive at 13x trailing earnings (10x 2017 Street estimates, which call for 11% year-over-year growth) and the recent declines seen in used car prices will be an issue for CACC (used car prices are not likely to rebound anytime soon, especially for the 7+ year old used cars that CACC’s dealer partners sell). While it is difficult to gauge the quality and rate of deterioration of CACC’s loan portfolios because the company does not disclose the usual credit statistics (i.e., delinquencies, defaults, etc.), the presenter believes the data provided by management does tell a concerning story. And, the mix shift towards a greater percentage of Purchase Program loans (at the expense of Partner Program loans) is problematic as well. Overall, the flood of cars coming off-lease as a result of record SAAR in recent years, pressure on used car/ residual values, lax underwriting with high-risk borrowers, and aggressive financing and accounting could lead to a decline to ~1x - or even a slight discount to - tangible book value (in line with other subprime auto lenders). At the end of 2016, CACC’s tangible book value per share was ~$59.