Credit Acceptance (CACC) Update

In the short period I have owned it, CACC's business has continued to perform remarkably, and I continue to be very impressed with management.

In the last few quarters CACC has experienced solid loan growth and performance with relatively minor spread concessions (due to modest term extensions). Importantly, they have also shown growth in loans per dealer (5.8% YoY in Q2 2015), which previously had been declining sharply. Management uses this metric to monitor industry competitiveness (increasing loans per dealer indicating declining competitiveness). A few other notes:

• Q2 2015 adjusted return on average capital: 12.7% (compared to peak of 18.7% in 2010, and last cycle trough of 11.2% in 2008)
• Q2 2015 spread on origination: 24.1% (compared to 2009 peak of 35.3%, and last cycle trough of 21.4% in 2007)
• Q1 and Q2 2015 YoY loan unit volume increase: 28.4%, 30.6% 
• Collection forecast variances continue to be positive
• After having the FTC complaint resolved without incident, no additional changes have occurred on the legal inquires (DOJ and Massachusetts AG)

In short, they are firing on all proverbial cylinders. 

The stock has risen quite a bit more rapidly than I would have expected. At $250, it currently trades at 18.4x management's adjusted earnings per share (Q2 2015 TTM).

At these levels, the market is pricing in a fair amount of growth and franchise value into the stock, which is probably reasonable. I still fear regulatory issues and the possibility that they could send the stock tumbling. As I've followed the industry more though, the fines that are coming out of the CFPB and DOJ seem manageable for CACC. I've seen fines ranging from $25mm at Honda to $100mm at Ally. If one assumes an $150mm (I assume higher than others in the industry to be conservative, not because I think CACC is "worse" than the others) hit to capital due to a regulatory fine, it trades at 19.8x (150mm fine at approximately 14% returns on capital and 21mm shares is $1 per share in earning power reduction).

All this considered, I sold a large percentage of my position at around $206 (average cost of $125). I still own a non-trivial position, but it is only in the 2-3% range. However, I have and will continue to consider adding to my position because it is rare that I find something I feel I understand reasonably well with a management team as strong as this one. Clearly to date, selling shares has been a mistake.

Disclosure: Long CACC