credit acceptance company CACC is expected to continue to experience revenue growth, supported by rising demand for auto loans, as well as an increase in dealership registrations and active dealerships. The company’s stock buyback policy also looks impressive.
Additionally, analysts are bullish on the stock. The Zacks consensus estimate for CACC earnings in 2022 has been revised up 1.1% in the past 60 days.
However, the steady increase in operating expenses should continue to hamper the growth of the company’s results. Deteriorating credit quality, supply chain disruptions in the automotive industry and high debt levels remain other near-term concerns. Therefore, CACC currently carries a Zacks rank #3 (Hold).
Over the past year, shares of Credit Acceptance have gained 53.4% against the 1.2% decline of the industry to which it belongs.
Image source: Zacks Investment Research
In terms of its fundamentals, Credit Acceptance revenue recorded a five-year compound annual growth rate (CAGR) (2017-2021) of 13.7%. The growth is mainly attributable to a steady increase in financial expenses, which is also the main component of revenue (representing 93.3% of total revenue in 2021). Finance charges should continue to improve as demand for auto loans steadily increases. A decent increase in dealership registrations and active dealerships should also support the company’s revenue growth.
As of December 31, 2021, Credit Acceptance had total debt of $4.6 billion, which is significantly higher than the cash and cash equivalents balance (including restricted cash and restricted securities) of $496.3 million. of dollars. Nonetheless, the company has a $340 million secured revolving line of credit and six warehouse facilities, with a total borrowing capacity of $1.25 billion. Thus, its current liquidity position is sufficient to meet its short-term debt obligations, even if the economic situation deteriorates.
CACC believes in returning capital to shareholders through share buybacks rather than paying dividends. In September 2021, it authorized the repurchase of an additional 2 million shares. As of December 31, 2021, the company still had 1.16 million shares to buy back. Despite substantial leverage, its high cash flow generating business model and low capital expenditure should help support share buybacks.
However, operating expenses have seen a CAGR of 10.9% over the past five years (end 2021). The increase is primarily due to higher salaries and wages and selling and marketing expenses. Operating expenses are expected to remain elevated in the near term, due to the company’s ongoing efforts to hire additional team members and sales force.
Credit Acceptance’s asset quality has deteriorated in recent years. While the provision for credit losses decreased in 2018 and 2021, it saw a substantial increase in 2020 due to coronavirus concerns. Given the steady increase in loan balances, provisions are expected to remain high in the near term.
Actions to Consider
A few higher-ranked stocks in the financial sector are Associated Bank-Corp SBA and Commerce Bancshares, Inc. CBSH. ASB and CBSH both have Zacks rank #2 (buy) at present. You can see the full list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks consensus estimate for Associated Banc-Corp’s current-year earnings has been revised up 4.8% over the past 60 days.
ASB shares are up 3.2% over the past year.
Commerce Bancshares recorded an upward revision to earnings estimates of 1.7% for 2022 in the last 60 days.
Over the past twelve months, CBSH stock has lost 4.1%.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.