Credit Acceptance (CACC) Secured $600 Million In Financing, Is The Stock Fully Valued?

Credit Acceptance (CACC) recently completed a $600 million asset-backed non-recourse secured financing, a material balance sheet event that allows the company to retire higher cost debt and retain significant unused borrowing capacity.

Over the past year, Credit Acceptance has seen its share price build momentum, with a year-to-date share price return of 30.90% and a 90-day share price return of 9.71%. The 1-year total shareholder return of 16.02% and 3-year total shareholder return of 18.76% sit against a weaker 5-year total shareholder return that declined 8.38%, suggesting recent news and balance sheet moves are being viewed more positively than the longer-term record.

Compare Credit Acceptance's balance sheet move with other lenders and financiers reshaping their funding mix by scanning the hand picked list of solid balance sheet and fundamentals (53 results) for ideas beyond this stock.

After a sharp share price run and a fresh US$600 million financing that reshapes Credit Acceptance's funding costs, investors may now be asking whether the current risk reward still leans in favour of new buyers once the valuation is laid out in full detail next.

Most Popular Narrative: 5.4% Undervalued

The most followed valuation narrative currently places Credit Acceptance's fair value at $628.33, modestly above the last close of $594.18. This frames a small implied upside.

The analysts have a consensus price target of $628.33 for Credit Acceptance based on their expectations of its future earnings growth, profit margins and other risk factors.

In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be $4.2 billion, earnings will come to $707.2 million, and it would be trading on a PE ratio of 9.9x, assuming you use a discount rate of 9.7%.

Read the complete narrative. Read the complete narrative.

If you want to understand why this narrative still sees upside even after a strong share price run, the entire case leans on aggressive revenue expansion, slimmer margins, and a very specific earnings multiple applied several years out. The way those three levers interact is what really drives that $628.33 figure.

Result: Fair Value of $628.33 (ABOUT RIGHT)

Have a read of the narrative in full and understand what's behind the forecasts.

However, the Credit Acceptance narrative could be knocked off course if loan performance stays weak or competition in subprime auto lending continues to pressure volumes and margins.

Find out about the key risks to this Credit Acceptance narrative.

Another View on Credit Acceptance's Valuation

The first narrative framed Credit Acceptance as roughly fairly valued with modest upside. Our DCF model points in a different direction. It estimates a future cash flow value of $356.17 per share compared with the current $594.18 price, which screens as materially overvalued on this measure. That raises a simple question for you: Which set of assumptions do you trust more, the earnings multiple story or the cash flow math?

To see how this cash flow view is built step by step, and what would need to change in the inputs for the gap to close, Look into how the SWS DCF model arrives at its fair value.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Credit Acceptance for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 50 high quality undervalued stocks. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Next Steps

If the mix of positives and concerns around Credit Acceptance still feels finely balanced, move quickly and check the underlying data and assumptions yourself. To see how the key risks and rewards stack up side by side, review the 3 key rewards and 2 important warning signs.

Looking for more investment ideas beyond Credit Acceptance?

If Credit Acceptance has sharpened your focus on risk and reward, do not stop here. Use the Simply Wall Street Screener to uncover fresh opportunities that fit your style.

• Target potential upside with companies that combine quality fundamentals with room for re rating through the 19 high quality undiscovered gems.
• Prioritise capital protection and steadier returns by scanning the 74 resilient stocks with low risk scores for stocks with more resilient profiles.
• Hunt for value by using the 50 high quality undervalued stocks to spot companies where price and fundamentals still look out of sync.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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