Strong Loan Demand Will Drive Operations, But Revenue Stability Will Be At Risk

Key Takeaways

• Record-high loan portfolio growth and strong Q3 performance suggest potential for increased revenue as market conditions improve.
  
• Investments in technology and innovation could enhance operational efficiencies and improve net margins.
  
• Consistent decline in collections, underwriting challenges, and external factors like natural disasters threaten future revenue and earnings stability.

Catalysts

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

• The company expects to continue producing substantial economic profit per share, even under challenging market conditions, indicative of long-term pricing strategies aimed at maximizing economic profit. This forward-looking approach is intended to sustain future earnings growth.
  
• Credit Acceptance has seen a record-high loan portfolio, which grew by 18.6% from Q3 2023, indicating strong demand and suggesting potential for increased revenue moving forward as market conditions stabilize.
  
• The company experienced its highest Q3 unit and dollar volume ever, with a steady growth trend in loan unit and dollar volume suggesting potential for future revenue increases as the market environment improves.
  
• Credit Acceptance is investing in technology and product innovation, aiming to improve dealer support and product offerings, which should enhance operational efficiencies and potentially lead to improved net margins.
  
• With significant buybacks over time and a consideration for intrinsic value when repurchasing shares, there is potential for future EPS growth as part of capital return strategy.

Credit Acceptance Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Credit Acceptance's revenue will grow by 56.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 22.4% today to 22.8% in 3 years time.
• Analysts expect earnings to reach $741.2 million (and earnings per share of $60.0) by about December 2027, up from $189.6 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.0x on those 2027 earnings, down from 31.7x today. This future PE is lower than the current PE for the US Consumer Finance industry at 12.6x.
• Analysts expect the number of shares outstanding to grow 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 9.06%, as per the Simply Wall St company report.

Credit Acceptance Future Earnings Per Share Growth

Risks

• The company has seen a consistent decline in forecasted collections and slower growth, which could affect its future revenue and profits if such trends continue.
  
• There are potential estimation and underwriting challenges affecting loan performance, particularly in volatile economic conditions post-pandemic. This could impact net margins if these issues persist.
  
• Lower consumer prepayments are causing cash flows to be pushed further into the future, reducing the yield on loans, which could negatively affect earnings.
  
• The impact of external factors such as hurricanes, while currently limited, could exacerbate financial challenges and further decrease collections and revenue.
  
• The company's forecast accuracy depends heavily on volatile market factors such as credit availability, and prolonged challenges in this area could impact future earnings stability.

Valuation

• The analysts have a consensus price target of $426.5 for Credit Acceptance based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $500.0, and the most bearish reporting a price target of just $374.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $3.2 billion, earnings will come to $741.2 million, and it would be trading on a PE ratio of 9.0x, assuming you use a discount rate of 9.1%.
• Given the current share price of $495.76, the analyst's price target of $426.5 is 16.2% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.