US Urbanization And Tech Modernization Will Drive Lending Expansion

Key Takeaways

• Robust demand from non-prime borrowers and demographic trends underpin long-term revenue growth and expand Credit Acceptance's auto loan market.
  
• Technology upgrades and advanced analytics are expected to boost operational efficiency, enhance risk management, and improve profitability.
  
• Declining loan performance, heightened competition, and economic uncertainty threaten Credit Acceptance's revenue growth, profitability, and ability to maintain positive returns above its cost of capital.

Catalysts

Engages in the provision of financing programs, and related products and services in the United States.

• Ongoing growth in the non-prime borrower segment and persistent income inequality in the U.S. are likely to support stable or increasing demand for Credit Acceptance's auto loan products, expanding the company's addressable market and sustaining long-term revenue growth.
  
• Continued U.S. population growth and urbanization will increase the pool of potential subprime borrowers needing access to vehicles, providing a structural tailwind for loan originations over time and supporting top-line revenue expansion.
  
• The recent investments in technology modernization
• including a revamped loan origination system and accelerated feature development
• should improve customer and dealer experiences, drive operating efficiency, and support net margin improvement through cost reductions.
  
• Adoption of more advanced data analytics and ongoing scorecard updates are expected to enhance risk assessment and loan performance over coming vintages, reducing future default rates and stabilizing or expanding net margins and earnings.
  
• A record-high loan portfolio despite recent origination and collection headwinds, combined with active share repurchases, positions the company for strong per-share earnings growth if collections stabilize and loan performance improves as projected.

Credit Acceptance Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Credit Acceptance's revenue will grow by 56.2% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 36.2% today to 11.3% in 3 years time.
• Analysts expect earnings to reach $504.0 million (and earnings per share of $45.72) by about August 2028, up from $424.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.4x on those 2028 earnings, down from 12.3x today. This future PE is greater than the current PE for the US Consumer Finance industry at 9.3x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.82%, as per the Simply Wall St company report.

Credit Acceptance Future Earnings Per Share Growth

Risks

• Continued underperformance of loan vintages from 2022, 2023, and 2024, as indicated by declining loan performance and forecasted net cash flows, suggests persistent credit risk and the potential for higher future charge-offs, negatively impacting net margins and earnings.
  
• Loan origination volumes and market share in the core segment (subprime used vehicle loans) have declined year-over-year, partly due to intensified competition and lower advance rates, threatening future revenue growth and limiting scale.
  
• The competitive environment has intensified, as evidenced by lower volume per dealer and explicit acknowledgment that increased competition contributed to declining unit and dollar volumes, which could pressure both revenue and profitability in the long run.
  
• Return on capital is only modestly above the cost of capital (8.5% vs 7.4%), and continued deterioration in loan performance could result in loans being originated at or below economic break-even, directly reducing earnings and jeopardizing future return on equity.
  
• Macroeconomic volatility and inflation continue to impact the accuracy of Credit Acceptance's forecasting models, making it harder to predict collections and manage credit risk, thereby increasing the risk of further downward revisions to cash flow forecasts and sustained pressure on net margins.

Valuation

• The analysts have a consensus price target of $467.5 for Credit Acceptance based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $4.5 billion, earnings will come to $504.0 million, and it would be trading on a PE ratio of 11.4x, assuming you use a discount rate of 10.8%.
  
• Given the current share price of $465.1, the analyst price target of $467.5 is 0.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.