*Note: Wow, less then 24 hours after I published yesterday’s Issue, Silicon Valley Bank stock drops more than %60 in one day! That’s what I call alpha.*
Yesterday we covered the general story arc of Credit Acceptance Corporation (CAC) so far, and the manifold legal issues facing the company. Today I’ll be running over the financial profile of the company and some of my general ideas about their performance in the future.
Introduction
Before we start, I’ll be so bold as to state why I think the company is actually investible:
The nexus of trust between lender, dealer, and borrower is unique, difficult to replicate, and brings alignment to a CAC loan,
The company has been good at forecasting the performance of their loan book. Very dramatic swings in the price of used cars, credit conditions, and the financial profile of customers has not resulted in a catastrophic outcome for the company’s existing loan book,
CAC builds redundancy (or a margin of safety) into their operations, and loan book. While less disciplined lenders are going out of business, CAC is expanding their business,
The company is remarkably profitable. They remained solidly profitable in 2008, 2009, and 2020. Their capital allocation framework is rational and shareholder friendly. A seemingly constant modest market valuation allows for very effective share repurchases.
At this point, the business quality is largely institutionalised - meaning that brilliance from management is not a necessary condition for future business success. However, I believe competence is not lacking from the current crop of executives. The major breakthroughs in the business were made by the founder Don Foss originally, and then expanded on by the former CEO Brett Roberts.
Some of the things that would make CAC uninvestible for me would be the following:
Constant large-scale legal action brought on by a decided change in social expectations,
An inability to access adequate funding for operations during advantageous times,
Actual large scale criminal activity conducted by the firm,
Proof to negative of a number of the aforementioned positive points.
The sole reason why I think it is actually possible to hold onto the shares for a long time, all things being equal, is that the company is disciplined, and is able to take advantage of difficult economic circumstances. Money is a commodity, and the only advantage a purveyor of it can have is discipline.
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