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Rise in Auto Loans Aid Credit Acceptance (CACC) Amid High Costs

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Credit Acceptance Corporation (CACC - Free Report) is expected to keep witnessing growth in revenues, supported by the rise in demand for auto loans, along with an increase in dealer enrollments and active dealers. The company’s share buyback policy also seems impressive.

Moreover, analysts are bullish on the stock. The Zacks Consensus Estimate for CACC’s 2022 earnings has been revised upward by 1.1% over the past 60 days.

However, persistently increasing operating expenses are likely to keep hurting the company’s bottom-line growth. Worsening credit quality, supply-chain disruptions in the automobile industry and high debt levels remain other near-term concerns. Hence, CACC currently carries a Zacks Rank #3 (Hold).

Over the past year, shares of Credit Acceptance have gained 53.4% against the 1.2% decline of the industry it belongs to.

 

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Looking at its fundamentals, Credit Acceptance’s top line witnessed a five-year (2017-2021) compound annual growth rate (CAGR) of 13.7%. Growth is primarily attributable to a steady rise in finance charges, which is also the main revenue component (accounting for 93.3% of total revenues in 2021). Finance charges are likely to continue improving as the demand for auto loans steadily rises. A decent rise in dealer enrolments and active dealers is also expected to support the company’s top-line growth.

As of Dec 31, 2021, Credit Acceptance had total debt of $4.6 billion, significantly higher than the cash and cash equivalent balance (including restricted cash and restricted securities) of $496.3 million. Nevertheless, the company has a $340-million revolving secured line of credit facility and six Warehouse facilities, with a total borrowing capacity of $1.25 billion. Thus, its current liquidity position is sufficient to meet near-term debt obligations, even if the economic situation worsens.

CACC believes in returning capital to shareholders through stock repurchases instead of paying dividends. In September 2021, it authorized additional 2 million shares to be repurchased. As of Dec 31, 2021, the company had 1.16 million shares left to be repurchased. Despite having a substantial debt burden, its high cash flow generating business model and low capital expenditure are likely to help sustain share buybacks.

However, operating expenses witnessed a CAGR of 10.9% over the last five years (ended 2021). The increase has mainly resulted from a rise in salaries and wages, and sales and marketing expenses. Operating expenses are expected to remain elevated in the near term, owing to the company’s continued efforts to hire additional team members and sales force.

Credit Acceptance’s asset quality has been deteriorating over the past few years. While provision for credit losses declined in 2018 and 2021, the same witnessed a substantial rise in 2020 on account of the coronavirus-related concerns. Given the steady rise in loan balances, provisions are expected to remain elevated in the near term.

Stocks to Consider

A couple of better-ranked stocks from the finance space are Associated Banc-Corp (ASB - Free Report) and Commerce Bancshares, Inc. (CBSH - Free Report) . Both ASB and CBSH carry a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for Associated Banc-Corp’s current-year earnings has been revised 4.8% upward over the past 60 days.

ASB’s shares have risen 3.2% in the past year.

Commerce Bancshares recorded an upward earnings estimate revision of 1.7% for 2022 over the past 60 days.

Over the past twelve months, CBSH stock has lost 4.1%.


In-Depth Zacks Research for the Tickers Above


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Commerce Bancshares, Inc. (CBSH) - free report >>

Credit Acceptance Corporation (CACC) - free report >>

Associated BancCorp (ASB) - free report >>