Improved Collections And Technology Will Secure Future Stability

Key Takeaways

• Credit Acceptance's enhanced collections and record loan portfolio growth contribute to improved revenue, cash flow stability, and future earnings potential.
  
• Investments in technology modernization and dealer support enhance operational efficiency and could improve margins and customer retention, supporting long-term growth.
  
• Declines in cash flow forecasts, increased competition, operational costs, market volatility, and economic uncertainties pose risks to revenue and earnings stability.

Catalysts

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

• Credit Acceptance has made significant progress in improving collections, with only a small decline in forecasted net cash flows, marking the smallest decline in the past eight quarters. This improvement in collections can lead to improved revenue streams and cash flow stability.
  
• The loan portfolio reached a new record high, with a 10% increase from the previous year, despite a decline in unit dollar volume growth. This growth in the loan portfolio is expected to contribute positively to revenue and earnings as the portfolio matures.
  
• The company is investing in modernizing its technology architecture and improving its go-to-market approach to better support dealers, which is expected to enhance operational efficiency. These changes are likely to improve net margins over time by reducing costs and improving service delivery.
  
• Credit Acceptance's strategic focus on dealer and consumer relationships is poised to drive future growth by expanding its active dealer network and increasing customer retention. This approach should positively impact revenue by increasing loan originations and improving customer loyalty.
  
• The company's financial flexibility, illustrated by maintaining a higher cash position due to conservative financing strategies, positions it well to navigate market volatility. This financial prudence is likely to stabilize earnings during economic uncertainties such as inflation and potential recession.

Credit Acceptance Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Credit Acceptance's revenue will grow by 67.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 29.2% today to 16.3% in 3 years time.
• Analysts expect earnings to reach $758.0 million (and earnings per share of $65.5) by about July 2028, up from $289.9 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 8.6x on those 2028 earnings, down from 20.6x today. This future PE is lower than the current PE for the US Consumer Finance industry at 9.7x.
• Analysts expect the number of shares outstanding to decline by 4.19% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.77%, as per the Simply Wall St company report.

Credit Acceptance Future Earnings Per Share Growth

Risks

• Recent declines in forecasted net cash flows and downward adjustments in unit dollar volume growth suggest potential risks in revenue generation and financial stability.
  
• Increased competition and strategic changes such as the Q3 2024 scorecard adjustment have led to a decrease in market share from 6% to 5.2%, which could impact future revenues and earnings.
  
• Higher operational costs, including elevated salaries and wages, may pressure net margins if such increases become a persistent trend rather than seasonal or one-time events.
  
• The volatility in the broader market, potential impacts of high inflation, tariffs, vehicle price fluctuations, and possible recession create uncertainties that could adversely affect forecast accuracy, impacting cash flows and earnings.
  
• The $76 million GAAP provision reflects slower cash flow timing and decreased undiscounted cash flows, indicating potential risks in future earnings stability if trends do not improve.

Valuation

• The analysts have a consensus price target of $495.25 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 $4.7 billion, earnings will come to $758.0 million, and it would be trading on a PE ratio of 8.6x, assuming you use a discount rate of 9.8%.
• Given the current share price of $515.88, the analyst price target of $495.25 is 4.2% 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.