Credit Acceptance Corp. (CACC) 29% Gain $1,089 Profit

Business Description

Credit Acceptance Corporation provides financing programs that enable automotive dealers to sell vehicles to consumers regardless of credit history. Credit Acceptance Corp. has a simple business model that has allowed them to scale over time. Their business model has not changed over the past 10 years and in that same time they have grown their EPS by over 650%.

In 2020, they had record revenue growth that was offset by a large "provision for credit losses". This is an expense they put aside in case the loans go sour and they can't collect. The average annual "provision for credit losses" is 5% of revenue, but in 2020 it was 33% of revenue. This caused EPS to drop by about $25. Additionally, they have had stock buybacks for over 10 years which increases the earnings per share every single year.

Why I purchased

By April 2021, the economy was recovering very well and I expected them to reverse their provision for credit losses since banks were doing the same. This means that they no longer expect to take those losses and it will then be counted as a gain for the next reporting period. When those losses are added back in, everyone will then see that Credit Acceptance actually had an extremely profitable year in both 2020 and 2021. I valued CACC at $465 and at my entry price of $360, it had 30% upside. Since it only had 30% upside, I only purchased a small piece. I was waiting for it to drop more, but it never gave me the opportunity to add to my position.

Why I sold

By July 2021, CACC had reached my target price of $465 and I sold everything. Since it was a small position for me, I was very comfortable in holding it and not taking any profits along the way.

Results

I ended up with $1,089 in profits or 29% gain on my investment.