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Credit Acceptance (NASDAQ:) Corporation (ticker: CACC) reported its fourth-quarter earnings, revealing both growth in loan volumes and a decline in forecasted collection rates. The company’s adjusted net income for the quarter stood at $129 million, marking a 17% decrease from the same period in the previous year. Adjusted earnings per share also fell by 14% to $10.06. Despite these declines, the company experienced growth in unit and dollar volumes, which rose by 26.7% and 21.3%, respectively, compared to the fourth quarter of 2022.
Key Takeaways
- Adjusted net income decreased by 17% year-over-year to $129 million.
- Adjusted earnings per share fell to $10.06, a 14% decrease from the previous year.
- Forecasted collection rates decreased, reducing net cash flows from the loan portfolio by $57 million or 0.6%.
- The average balance of the loan portfolio increased by 9% on a GAAP basis and 13% on an adjusted basis.
- Initial spread on consumer loan assignments increased to 21.7% from 20.9% year-over-year.
- Average cost of debt rose due to higher interest rates and repayment of older secured financings with lower rates.
Company Outlook
- The company reported the largest average balance of its loan portfolio to date, indicating potential for continued growth.
- An increase in initial spread on consumer loans suggests improved profitability per loan.
Bearish Highlights
- A decrease in forecasted collection rates led to a reduction in net cash flows from the loan portfolio.
- Forecasted profitability for consumer loans assigned between 2020 and 2022 was lower than previous estimates.
- Slower forecasted net cash flow timing in 2023 was noted, primarily due to a decrease in consumer loan prepayments.
Bullish Highlights
- Unit and dollar volumes grew substantially compared to the previous year, indicating strong growth momentum.
- The company achieved an increase in the initial spread on consumer loan assignments.
Misses
- Adjusted net income and earnings per share both declined compared to the fourth quarter of 2022.
Q&A Highlights
- The competitive environment is seen as favorable, with volume per dealer increasing despite the rise in dealer enrollments.
- Interest rates have increased, impacting the cost of debt and potentially affecting future interest expenses.
- Adjusted yield declined to 17.9% in Q4 from 18.5% in Q3, with future performance dependent on new loan originations and loan performance.
- Share buybacks amounted to approximately 100,000 shares in the quarter.
- The company’s leverage is within the historical range, and capital allocation priorities focus on funding loan originations over share buybacks.
- Adjustments to underwriting and loan pricing are continuously made to ensure profitability despite uncertainties in loan performance and used vehicle prices.
- It is too early to make conclusive comments on the health of the consumer base, though early indications show 2023 loans performing better than those in 2022 at the same age.
Credit Acceptance’s results reflect a complex financial landscape, with the company navigating challenges such as declining collection rates and increased costs of debt while still managing to grow loan volumes and maintain a strong loan portfolio balance. The company is adjusting its strategies to ensure continued profitability amid changing economic conditions.
InvestingPro Insights
Credit Acceptance Corporation’s (CACC) latest financial data and analysts’ insights paint a nuanced picture of the company’s position in the market. The company’s liquid assets surpassing short-term obligations is a positive sign of financial health, suggesting a robust liquidity position that could help navigate short-term market fluctuations. This is especially relevant given the company’s reported decline in forecasted collection rates, as it indicates a buffer to uphold operations despite potential cash flow challenges.
The strong return over the last three months, with a 30.25% price total return, aligns with the growth in unit and dollar volumes reported in the fourth quarter, underscoring the company’s growth momentum. This performance is also reflective of the InvestingPro Tip that CACC has had a high return over the last decade, which may interest long-term investors looking for sustained growth.
Analysts are optimistic about the company’s profitability, predicting that CACC will remain profitable this year. This forward-looking sentiment is supported by the company’s historical performance, with profitability over the last twelve months as of Q1 2023, and an operating income margin of 44.57%. These metrics suggest that despite recent challenges, the company has a track record of generating substantial profits relative to its revenues.
InvestingPro Data further reveals a P/E Ratio (Adjusted) of 21.26 for the last twelve months as of Q1 2023. While the market cap stands at $6.8 billion, the revenue has seen a decline of 28.72% over the same period, which could be a point of concern for investors focusing on top-line growth.
For those interested in delving deeper into the company’s financials and future prospects, InvestingPro offers additional insights. There are several more InvestingPro Tips available for subscribers, providing a comprehensive analysis of CACC’s financial health and performance. With the InvestingPro subscription now on a special New Year sale with a discount of up to 50%, investors can gain access to this valuable information at a reduced cost. To further sweeten the deal, use coupon code “SFY24” to get an additional 10% off a 2-year InvestingPro+ subscription, or “SFY241” to get an additional 10% off a 1-year InvestingPro+ subscription.
Full transcript – Credit Acceptance (CACC) Q4 2023:
Operator: Good day everyone and welcome to the Credit Acceptance Corporation Fourth Quarter 2023 Earnings Call. Today’s call is being recorded. A webcast and transcript of today’s earnings call will be made available on Credit Acceptance’s website. At this time, I would like to turn the call over to Credit Acceptance’s Chief Financial Officer, Jay Martin.
Jay Martin: Thank you. Good afternoon and welcome to the Credit Acceptance Corporation fourth quarter 2023 earnings call. As you read our news release posted on the Investor Relations section of our website at ir.creditacceptance.com, as you listen to this conference call, please recognize that both contain forward-looking statements within the meaning of federal securities law. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control and which could cause actual results to differ materially from such statements. These risks and uncertainties include those spelled out in the cautionary statement regarding forward-looking information included in the news release. Consider all forward-looking statements in light of those and other risks and uncertainties. Additionally, I should mention that to comply with the SEC’s Regulation G, please refer to the financial results section of our news release which provides tables showing how non-GAAP measures reconcile to GAAP measures. At this time, I will turn the call over to our Chief Executive Officer, Ken Booth, to discuss our fourth quarter results.
Ken Booth: Thanks, Jay. Our GAAP and adjusted results for the quarter include: adjusted net income of $129 million which is a 17% decrease from the fourth quarter of 2022. Adjusted earnings per share of $10.06 which is a 14% decrease from the fourth quarter of 2022. In terms of collections, we had a decrease in forecasted collection rates that decreased forecasted net cash flows from our loan portfolio by $57 million or 0.6% compared to a decrease in forecasted collection rates during the fourth quarter of 2022 that decreased forecasted net cash flows from our loan portfolio by $41 million or 0.5%. We also had forecasted profitability for consumer loans assigned in 2020 through 2022 that was lower than our estimates at December 31, 2022, due to a decline in forecasted collection rates since the fourth quarter of 2022. Also, we have slower forecasted net cash flow timing during 2023, primarily as a result of a decrease in consumer loan payments — prepayments to below historical average levels. From a growth standpoint, unit and dollar volumes grew 26.7% and 21.3%, respectively, as compared to the fourth quarter of 2022. The average balance of our loan portfolio is now the largest it has ever been. On a GAAP and adjusted basis, it increased by 9% and 13%, respectively, as compared to the fourth quarter of 2022. Our results also included an increase in initial spread on consumer loan assignments to 21.7% compared to 20.9% on consumer loans assigned in the fourth quarter of 2022. And an increase in our average cost of debt which was primarily due to higher interest rates than recently completed or extended secured financing and the repayment of older secured financings with lower interest rates. At this time, Doug Busk, our Chief Treasury Officer; Jay Martin and I will take your questions.
Operator: [Operator Instructions] Our first question comes from the line of Moshe Orenbuch of TD Cowen.
Moshe Orenbuch: Great. Gentlemen, if you could just talk a little bit about the competitive environment and kind of how you see it at this stage reflected in the spreads that you’re seeing.
Ken Booth: We feel pretty good about the competitive environment. Volume per dealer is a good metric to reflect the intensity of the environment. It increased — despite the increase in dealer enrollments, new dealers are generally less productive for season dealers. But that — just our overall growth rate was very high for the quarter and for the 30 days subsequent to year-end.
Moshe Orenbuch: Yes. I didn’t see the January, were the January numbers in the release for volumes?
Douglas Busk: Yes. Yes. It was 21.5% for the first 30 days.
Moshe Orenbuch: At the same time, interest rates have been up a lot. And could you talk a little bit about how the financing you did during Q4 are going to impact interest expense? And is there a way to relate that to the amount of spread that you need to pick up to offset that?
Douglas Busk: I mean the interest rate in Q4 was 6.3% versus 5.8% in Q3. That obviously doesn’t include a full quarter of the $600 million senior note issuance. So all things equal, I expect that number would be even higher going forward. What we try to do when we price our loans is maximize the amount of economic profit, that’s economic profit for long times the number of loans. And in doing that, we consider the anticipated expenses were going to occur over the life of the loan, including interest, sales and marketing, G&A and salaries and wages. So as interest or other expenses go up, we either need to be satisfied with the lower return or reduce our [indiscernible] relative to the anticipated net cash flows.
Moshe Orenbuch: Got it. And you did note that there was another kind of write-down for forecast changes in the quarter. Can you talk a little bit about how that will affect the adjusted yield as we go forward?
Douglas Busk: I mean the adjusted yield declined to 17.9% in Q4 from 18.5% in Q3. What happens in Q1 will be dependent on the yield on new loan originations and loan performance in Q1. But all else equal, if nothing else changed, you would expect a decline in forecasted net cash flows in Q4. It’s put a bit of further pressure on the adjusted yield in Q1. But again, that make some big assumptions about all else equal.
Moshe Orenbuch: Got you. And then just last one for me is, fourth quarter, we don’t get the 10-Q. So it looks like you bought back 44,000 shares. Is that math correct? Like is that the right amount?
Douglas Busk: I mean I think we bought approximately 100,000 shares back, a little over 100,000.
Operator: [Operator Instructions] Our next question comes from the line of Robert Wildhack of Autonomous Research.
Robert Wildhack: A question on the forecast and collections and adjusted yield as well. First, what’s behind the continued drop in forecasting collections? Is there anything specific that you’d highlight there? And then do you have any insight or thoughts on when that could ultimately bottom?
Douglas Busk: I mean I think it’s — the reason for the loan performance being worse than initially expected as a combination of things, including the fact that those loans were originated in a very competitive period which hurts loan performance. Those consumers finance vehicles at relatively peak valuations. I think the impact of inflation on the consumer has also contributed. It’s impossible to say when loan performance will level out. If I look at the 2015 book of business, it leveled out after this point. I mean it’s still declined but at a slower rate, whether that pattern will hold true on the ’22 business remains to be seen. But absolutely at some point, it will level out. It’s just difficult to say precisely when.
Robert Wildhack: Okay. And then could you speak to the current leverage level and your capacity to both continue to keep — to continue buying back shares and also continue growing at this current pace?
Douglas Busk: Our leverage on an adjusted basis is within the historical range. So we’re very comfortable with where we are today. Obviously, our GAAP leverage is different. And it’s an apples towards just comparison of pretty 2020 to today’s leverage. But on a consistently applied basis, our leverage is within the historical norm. The way we think about buybacks is our first priority is always to make sure that we have the capital that we need to fund anticipated levels of loan originations. So what that means is we’re growing faster, all else equal, we buy back less stock. That doesn’t mean we don’t buy any but it means we buy back less.
Operator: Our next question comes from the line of Vincent Caintic of Stephens.
Vincent Caintic: First one, so you highlighted that the average loan balance as high as it’s been in the loan terms have also been increasing. Just wondering if you’re kind of comfortable with those ranges, can you take them higher? And if there are any other adjustments that you are thinking about when you think about underwriting?
Douglas Busk: I mean the consumer loan balance was pretty flat on a year-over-year basis. Loan term was up a month. So I don’t think there’s been a dramatic change over the last couple of years.
Vincent Caintic: Okay. And then on for the forecasted collections. I’m wondering if there’s any macro assumptions that are baked into there, I guess the — for instance, the Manheim Index with used car sales and used car prices or Fed rate cuts or anything like that. I don’t know if that has any influence on your forecasted collections. So if you could talk about that.
Douglas Busk: We don’t include macro variables like unemployed rates or inflation rates or GDP or anything like that. We do have depreciation curve that we end up using to model forecasted collection rates. So that’s factored in. But no one really knows what is going to happen to used vehicle prices over a 60-month loan term. So the way that we deal with uncertainty associated with used car prices and all the other uncertainties is just by building up pretty significant margin of safety into our loan pricing when they are originated. We do that. So even a loan performance is worse than expected, our loans are still likely to produce that effective levels of profitability.
Vincent Caintic: Okay. And last one for me. So I understand you have forecast collections and maybe change underwriting or change some variables to get to your desired results. But when you think about the consumer that you’re lending to just if you can — if you have any views about how that consumer health is doing, are trends getting better as you — over the past couple of quarters?
Douglas Busk: It’s pretty early to say. Thus far, the 2023 loans are performing better at the same age than the 2022 loans were. But again, that book of business really isn’t all that season. We have made adjustments as we’ve seen the underperformance of the ’21 and ’22 loans. We’ve incorporated — we’re always making changes to our forecast based on recent trends and loan performance. So we have made adjustments to our forecast there. But I think it’s too early to have a conclusive comment on consumer health.
Operator: With no further questions in the queue, I would like to turn the call back over to Mr. Martin for any additional or closing remarks.
Jay Martin: We would like to thank everyone for their support and for joining us on the conference call today. If you have any additional follow-up questions, please direct them to our Investor Relations mailbox at ir@creditacceptance.com. We look forward to talking to you again next quarter. Thank you.
Operator: Once again, this does conclude today’s conference. We thank you for your participation.
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