CACC has a remarkable track record, as evidenced by the following:
| GAAP EPS | % Change | Adjusted EPS (1) | % Change | BVPS | % Change | |
| 2001 | 0.57 | 0.57 | 6.50 | |||
| 2002 | 0.69 | 21.1% | 0.70 | 22.8% | 7.29 | 12.1% |
| 2003 | 0.57 | -17.4% | 0.55 | -21.4% | 7.91 | 8.5% |
| 2004 | 1.40 | 145.6% | 1.37 | 149.1% | 7.34 | -7.2% |
| 2005 | 1.85 | 32.1% | 1.74 | 27.0% | 9.51 | 29.7% |
| 2006 | 1.66 | -10.3% | 1.59 | -8.6% | 5.96 | -37.3% |
| 2007 | 1.76 | 6.0% | 2.03 | 27.7% | 8.52 | 42.9% |
| 2008 | 2.16 | 22.7% | 2.65 | 30.5% | 10.86 | 27.4% |
| 2009 | 4.62 | 113.9% | 4.03 | 52.1% | 15.73 | 44.9% |
| 2010 | 5.67 | 22.7% | 5.70 | 41.4% | 15.82 | 0.6% |
| 2011 | 7.07 | 24.7% | 7.34 | 28.8% | 20.30 | 28.3% |
| 2012 | 8.58 | 21.4% | 8.58 | 16.9% | 24.29 | 19.7% |
| 2013 | 10.54 | 22.8% | 10.43 | 21.6% | 31.24 | 28.6% |
| CAGR | 27.5% | 27.4% | 14.0% | |||
| 5 Year | 37.3% | 31.5% | 23.5% | |||
| 10 Year | 33.9% | 34.2% | 14.7% |
(1) See CACC's annual report for the meaning of this term. They adjust for asymmetries in US GAAP treatment of earnings and are adjustments that I agree with.
Business
CACC provides financing to dealers through two programs: (1) the Portfolio Program, and (2) the Purchase Program. In the Purchase Program, CACC buys loans originated by dealers directly. For 2013, the Portfolio Program accounted for 93.5% versus 6.5% for the Purchase Program. Under the Portfolio Program, as compensation for the loan, the dealers receives (a) an upfront "advance", and (b) payments that depend on the future performance of the loan ("dealer holdback"). Subsequently:
Business
CACC provides financing to dealers through two programs: (1) the Portfolio Program, and (2) the Purchase Program. In the Purchase Program, CACC buys loans originated by dealers directly. For 2013, the Portfolio Program accounted for 93.5% versus 6.5% for the Purchase Program. Under the Portfolio Program, as compensation for the loan, the dealers receives (a) an upfront "advance", and (b) payments that depend on the future performance of the loan ("dealer holdback"). Subsequently:
- Consumer sends CACC principal plus interest
- CACC is reimbursed collection expenses
- CACC takes 20% of remaining amount as a servicing fee
- CACC uses any remaining amount to reduce advance dollar for dollar (i.e., not according to some "advance" amortization schedule) until the advance balance is zero
- Any remaining amount is paid to the dealer
One can think of CACC owning an ABS with a 20% coupon where the dealer takes the first loss position. Dealers are incentivized to place more loans with CACC by providing that they be able to pool every 100 loans placed and receive accelerated dealer holdback payments related to these loans.
CACC insists on a margin of safety in pricing the loans as illustrated by the following:
| Consumer Loan Assignment Year | Forecasted Collection % | Advance % | Spread % |
| 2004 | 73.0% | 44.0% | 29.0% |
| 2005 | 73.7% | 46.9% | 26.8% |
| 2006 | 70.0% | 46.6% | 23.4% |
| 2007 | 67.9% | 46.5% | 21.4% |
| 2008 | 70.1% | 44.6% | 25.5% |
| 2009 | 79.2% | 43.9% | 35.3% |
| 2010 | 77.0% | 44.7% | 32.3% |
| 2011 | 74.1% | 45.5% | 28.6% |
| 2012 | 73.5% | 46.3% | 27.2% |
| 2013 | 73.3% | 47.6% | 25.7% |
The spread is a very important metric to track. The trend of late has been downward which is a concern. This is a function of the competitive environment, which I discuss further below.
The forecasted collection percentages shown in the table above are based on a statistical model. Accurately forecasting collection rates is critical to their business, and the following illustrates their forecast performance:
The forecasted collection percentages shown in the table above are based on a statistical model. Accurately forecasting collection rates is critical to their business, and the following illustrates their forecast performance:
| Forecast as Of | Variance from | ||||
| Consumer Loan Assignment Year | Dec 2013 | Dec 2012 | Initial Forecast | Dec 2012 | Initial Forecast |
| 2004 | 73.0% | 73.0% | 73.0% | 0.0% | 0.0% |
| 2005 | 73.7% | 73.6% | 74.0% | 0.1% | -0.3% |
| 2006 | 70.0% | 69.9% | 71.4% | 0.1% | -1.4% |
| 2007 | 67.9% | 68.0% | 70.7% | -0.1% | -2.8% |
| 2008 | 70.1% | 70.3% | 69.7% | -0.2% | 0.4% |
| 2009 | 79.2% | 79.5% | 71.9% | -0.3% | 7.3% |
| 2010 | 77.0% | 77.3% | 73.6% | -0.3% | 3.4% |
| 2011 | 74.1% | 74.1% | 72.5% | 0.0% | 1.6% |
| 2012 | 73.5% | 72.2% | 71.4% | 1.3% | 2.1% |
| 2013 | 73.3% | -- | 72.0% | -- | 1.3% |
On average, their forecasts have been conservative by 1.3%.
Discipline is critical for any lender. As Charlie Munger mentioned, "The first chance you have, to avoid a loss from a foolish loan is by refusing to make it; there is no second chance." I think the following table tells the story of a disciplined underwriter.
There's some noise in this table (e.g., 2008 and 2009 volumes per dealer decreased as a result of capital constraints rather than the willingness to write business), but it shows that CACC is more inclined to grow unit volume by adding dealers rather than by adjusting pricing to drive per dealer volume levels. Of course, all else equal, they would prefer to see per dealer unit volumes increasing. But I think management behaves prudently.
The below table shows the total unit volume and active dealer growth through time.
Growth has been very strong, but has of late been slowing. This too is a function of the competitive environment which I discuss below.
Discipline is critical for any lender. As Charlie Munger mentioned, "The first chance you have, to avoid a loss from a foolish loan is by refusing to make it; there is no second chance." I think the following table tells the story of a disciplined underwriter.
| Year | Average Unit Volume Per Dealer | % Change |
| 2001 | 52.5 | |
| 2002 | 59.1 | 13% |
| 2003 | 64.7 | 9% |
| 2004 | 61.2 | -5% |
| 2005 | 46.2 | -25% |
| 2006 | 41.3 | -11% |
| 2007 | 37.7 | -9% |
| 2008 | 37.2 | -1% |
| 2009 | 35.0 | -6% |
| 2010 | 42.7 | 22% |
| 2011 | 44.5 | 4% |
| 2012 | 35.7 | -20% |
| 2013 | 31.6 | -11% |
There's some noise in this table (e.g., 2008 and 2009 volumes per dealer decreased as a result of capital constraints rather than the willingness to write business), but it shows that CACC is more inclined to grow unit volume by adding dealers rather than by adjusting pricing to drive per dealer volume levels. Of course, all else equal, they would prefer to see per dealer unit volumes increasing. But I think management behaves prudently.
The below table shows the total unit volume and active dealer growth through time.
| Unit Volume | % Change | Active Dealers | % Change | |
| 2001 | 61,928 | 1,180 | ||
| 2002 | 49,801 | -19.6% | 843 | -28.6% |
| 2003 | 61,445 | 23.4% | 950 | 12.7% |
| 2004 | 74,154 | 20.7% | 1,212 | 27.6% |
| 2005 | 81,184 | 9.5% | 1,759 | 45.1% |
| 2006 | 91,344 | 12.5% | 2,214 | 25.9% |
| 2007 | 106,693 | 16.8% | 2,827 | 27.7% |
| 2008 | 121,282 | 13.7% | 3,264 | 15.5% |
| 2009 | 111,029 | -8.5% | 3,168 | -2.9% |
| 2010 | 136,813 | 23.2% | 3,206 | 1.2% |
| 2011 | 178,074 | 30.2% | 3,998 | 24.7% |
| 2012 | 190,023 | 6.7% | 5,319 | 33.0% |
| 2013 | 202,250 | 6.4% | 6,394 | 20.2% |
| CAGR | 10.4% | 15.1% | ||
| 5 Year | 10.8% | 14.4% | ||
| 10 year | 12.7% | 21.0% |
Growth has been very strong, but has of late been slowing. This too is a function of the competitive environment which I discuss below.
Competitive Environment and Market
The competitive environment is characterized by (1) saturation - there are many competitors (NICK, SC, CPSS, commercial banks, savings banks, credit unions, WFC moving more into subprime space etc), and (2) reduced volumes due to trailing off of pent up demand during the crisis. This combination of forces is a concern. Are we at the top of the cycle with a slow motion crash ahead (rates decrease and losses rise slowly, but dramatically)? I'm not one to predict cycles, but I actually don't think this would be so bad for CACC because they strike me as very disciplined, and over time it would weed out weaker players and tighten supply. Anecdotal commentary I’ve read though indicates that (a) on the supply side, while loose historically, it is still tighter than 2006-2007, and (b) losses in subprime credits remain at historical lows.
Overall, while a very legitimate concern, I take comfort in the fact that management has navigated these cycles successfully in the past by sticking to their principles and staying disciplined on price. I also take comfort in the ‘skin in the game’ portfolio program approach CACC takes (rather than outright purchases). This significantly reduces credit risk relative to the alternative, and gives dealers an additional revenue source.
As Don Foss (the founder and chairman) mentioned, while there are not barrier to entries, there are plenty of barriers to making money. Operationally, CACC seems very well positioned relative to its competitors. Below is a table comparing return on assets (unlevered capital) achieved by CACC and it's 'pureplay' competitors.
ROA
|
2004
|
2005
|
2006
|
2007
|
2008
|
2009
|
2010
|
2011
|
2012
|
2013
|
Latest Qtr
|
CACC
|
7.47
|
11.99
|
8.72
|
6.59
|
6.45
|
12.63
|
13.5
|
12.12
|
11.29
|
11.08
|
10.05
|
NICK
|
5.39
|
7.21
|
7.81
|
7.18
|
5.33
|
2.43
|
5.28
|
7.34
|
8.88
|
7.65
|
6.91
|
SC
|
—
|
—
|
—
|
—
|
—
|
—
|
—
|
3.96
|
3.75
|
3.09
|
3.09
|
CPSS
|
-2.52
|
0.35
|
0.92
|
0.69
|
-1.33
|
-4.23
|
-3.74
|
-1.77
|
7.2
|
1.73
|
1.84
|
And below is a table comparing efficiency ratios.
Operating Exp to Int Income
|
|
| CACC | 23% |
| NICK | 35% |
| SC | 18% |
| CPSS | 33% |
These two tables combined paint a picture of a company that is extremely well run as compared to it's competitors. While SC has a lower efficiency ratio than CACC, it operates with much higher leverage (which allows it to earn greater interest income; raising the denominator, lowering the ratio) to achieve this. Note their are many competitors that are not listed here (banks etc), but it is still worthwhile to compare figures against the "pureplay" competitors that the data is easy to obtain for.
Management
CACC has a very small share of the market. There are approximately 40 million used cars sold annually, 60 million adults with sub-prime credit scores and 60,000 dealerships. In 2013, 6,168 dealerships originated 202,250 loans with CACC. The opportunities for CACC remain large.
Management
CACC management appears to be quite shareholder friendly, focused, and rational. Their communication and annual letters are clear and full of useful information. They also accumulate commonly asked investor questions and present the answers in writing on their website. From reading managements communication, three themes jumped out at me: focus, discipline, and rationality.
An interesting video with management being featured is here: http://youtu.be/wah9p824nYg. Some of this video seems quite scripted, but it does give a decent picture of the management style.
Share Repurchases
The company is also a regular purchaser of it's own shares:
The company is also a regular purchaser of it's own shares:
| Diluted Shares | |
| 2001 | 43,150,804 |
| 2002 | 43,362,741 |
| 2003 | 43,409,007 |
| 2004 | 41,017,205 |
| 2005 | 39,207,680 |
| 2006 | 35,283,478 |
| 2007 | 31,153,688 |
| 2008 | 31,105,043 |
| 2009 | 31,668,895 |
| 2010 | 29,984,819 |
| 2011 | 26,600,855 |
| 2012 | 25,598,956 |
| 2013 | 24,009,593 |
Since year end, the company has purchased an additional 637,420 shares, and announced a tender for 915,750 shares. Repurchases have the effect of raising financial leverage. Below is CACC's leverage as compared to competitors.
| 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | Latest Qtr | |
| CACC | 2.0x | 1.7x | 3.5x | 3.6x | 3.4x | 2.4x | 2.8x | 3.3x | 3.4x | 3.2x | 3.6x |
| NICK | 3.8x | 2.6x | 2.6x | 2.5x | 2.4x | 2.3x | 2.2x | 2.1x | 1.9x | 2.1x | 2.0x |
| SC | — | — | — | — | — | — | — | 8.8x | 8.5x | 9.8x | 9.9x |
| CPSS | 11.0x | 15.7x | 15.5x | 20.0x | 18.2x | 30.0x | 163.1x | — | 16.9x | 14.8x | 14.1x |
None of these competitors have sticky deposits that would justify obviously higher ratios. So while CACC is quite leveraged, they appear to be on the more modest end of the spectrum.
- The main risk that CACC faces in my view is funding. They are highly dependent on the capital markets, which no question is not ideal. While I cannot dismiss this risk entirely, the 2008 credit crisis was a very good stress test of their business model, and they passed with flying colors. They grew adjusted earnings per share 30.5%, 52.1%, and 41.4% in 2008, 2009, and 2010 respectively. This is in spite of decreasing loan volume in 2009 due to capital constraints imposed by the crisis.
- As discussed, the competitive environment poses a persistent threat.
- Collection forecasting accuracy is critical to their success. Competition threatens the accuracy of their forecasts by way of adverse selection. They regularly present backtests and have historically been conservative in their forecasts.
- Specialty finance companies do not sell for premium earnings multiples. I'm not sure if this is due to some stigma, or just the fact that they're balance sheet lenders (commodity). Other than companies in trough/unusual earnings situations, only a couple companies currently trade at earnings multiples in the high teens (e.g., FCFS at 17x).
- Don Foss (founder and chairman, age 69) is selling all of his shares. Mr. Foss owns roughly 4.4mm shares, and per disclosures in recent tender offers, he intends to sell 100% of these. I'm not exactly sure what to make of this, but I think it's doubtful that he is opportunistically selling based on his view that the price as currently high, and also doubtful that he thinks the company’s prospects long term are poor (after going for 41 years, through multiple cycles, and recent performance etc). Mr. Foss has been selling for a long time, somewhat consistently. I haven't gone through all the tenders, but he was tendering large quantities of shares both in October 2006 and July 2010 (two totally different points of the cycle).
- Regulation - Dodd-Frank established the Consumer Finance Protection Bureau (CFPB). While the CFPB is a potential wildcard, at the moment it does not seem to be cause of much concern from CACC's perspective. To date their main focus seems to be fair lending practices (i.e., not discriminating based on race, religion etc). Something to keep a close eye on.
Conclusion
I purchased CACC based on:
- Track record: Their track record is very strong. The last 5y/10y, they have compounded BVPS 23.5%/14.7%, adjusted EPS 31.5%/34.2%, and unit volumes 10.8%/12.7%.
- Management ethos: I am very impressed by management. They (a) strike me as very rational, focused, and disciplined; operate on margin of safety/value investing principles, (b) strong capital allocation; have also bought back a lot of stock (24%/42% of the stock the last 5y/10y), and (c) seem to be shareholder friendly; quite clear and transparent communication
- At 11.9x TTM NI (management’s “adjusted” earnings), the price seems reasonable, or at least not unreasonable. For context, historically CACC has sold for 13.5x-14x earnings on average the last decade; competitors currently trade in ranges of 9x (CPSS) to 15x (SC). My thinking is you're not paying a lot, if anything, for growth which they have delivered plenty of.
Disclosure: Long CACC
