Expanding Dealer Network Will Boost Future Market Position In Subprime Financing

Key Takeaways

• Credit Acceptance's strategic focus on expanding its dealer network and market share in subprime financing could drive future revenue growth.
  
• Investments in technology modernization and product innovation are expected to enhance efficiency and improve net margins.
  
• Slowing growth, increased competition, and scorecard changes may limit revenue growth, while legal and regulatory expenses create financial volatility and pressure on margins.

Catalysts

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

• The company's loan portfolio is at a record high of $8.9 billion, up 15% from last year, with increased market share in subprime used vehicle financing, which may drive future revenue growth.
  
• Credit Acceptance is making progress in product innovation and enhancing their go-to-market approach, potentially increasing efficiency and improving net margins.
  
• Investment in modernizing technology architecture and work processes suggests future cost efficiencies, impacting earnings positively.
  
• The addition of 902 new dealers during the quarter and the record-high number of active dealers may enhance distribution channels and boost future revenue.
  
• Slight collaborations with collections and adjustments to the credit scorecard could lead to improved accuracy in forecasting and financial stability, which might stabilize or increase net margins.

Credit Acceptance Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Credit Acceptance's revenue will grow by 49.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 26.7% today to 22.8% in 3 years time.
• Analysts expect earnings to reach $712.3 million (and earnings per share of $60.13) by about March 2028, up from $247.9 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 9.8x on those 2028 earnings, down from 23.6x today. This future PE is lower than the current PE for the US Consumer Finance industry at 11.0x.
• Analysts expect the number of shares outstanding to decline by 0.66% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.36%, as per the Simply Wall St company report.

Credit Acceptance Future Earnings Per Share Growth

Risks

• Slowing growth in collections and originations, including challenges with the 2022 vintage underperforming expectations, may negatively impact forecasted net cash flows and revenue growth.
  
• A recent scorecard change designed to minimize risk has led to reduced advance rates, impacting originations and potentially decreasing future revenue streams.
  
• Increased competition in the subprime vehicle financing market may limit growth opportunities, affecting market share and revenue expansion.
  
• Volatility in collections, especially concerning historical underperformance of certain cohorts, raises forecasting challenges and may lead to fluctuations in net margins.
  
• Legal and regulatory expenses contribute to financial volatility, creating potential pressure on earnings and operating margins in the near term, despite current reductions.

Valuation

• The analysts have a consensus price target of $483.75 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 $3.1 billion, earnings will come to $712.3 million, and it would be trading on a PE ratio of 9.8x, assuming you use a discount rate of 9.4%.
• Given the current share price of $485.7, the analyst price target of $483.75 is 0.4% lower. 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.