Trading at 11X PE, CACC is an interesting play on a growing company that is well positioned to benefit from a recovery in the auto market.  The company has a strong history of consistent growth in the past 5 years (25% revenue CAGR, 38% earnings CAGR) as the company has continued to gain share and expand operations in the U.S. at a high ROE (ROE of ~50%).  The company currently has a small (<10%) market share in huge market (18,460 New-Car dealerships, with over 37,000 separate franchises in US*), and only 1.2% share by sub-prime loan volume. 

CACC provides auto loans to U.S. consumers, regardless of their credit history.  CACC offers 100% guaranteed used car financing nation wide through a network of automotive dealers.  CACC allows automobile customers financing they would not otherwise have.  The company offers these loans through a portfolio program and a purchase program. Its portfolio program includes advancing money to dealer-partners in exchange for the right to service the underlying consumer loans; and purchase program consists of buying the consumer loans from the dealer-partners and keeping amounts collected from the consumers. The company markets its products through a network of independent and franchised automobile dealers. CACC selectively purchases loans originated by dealer partners (began program in 2005) and only from the participating dealers.  As of 2010, CACC had 3,206 active-dealer partners (originated at least 1 loan in past year) with 1,263 new enrollments in 2010.  The company splits every dollar collected 80 / 20 with dealer.  As a result, the company is effectively an indirect auto loan lender/sub-prime auto collection service. 

CACC has a focused business model which provides a valuable service for dealers, consumers, and lenders financing asset backed loans.  Though this is a highly fragmented industry (CACC has <10% market share), it’s a difficult product to sell well.  That said, CACC has had demonstrated success growing in this sector.  There are modest economies of scale in the analysis of data and the efficiency and tactics of collection, which CACC leverages through its expansion.  Importantly, CACC has a strong, internally trained, management team that has been very shareholder friendly over the year (stock repurchase, EVA compensation, no self-dealing).  Management has been improving its competitive position over time by investing in IT and improving its techniques, data, to grow its portfolio which has allowed them to be effective at predicting collection rates at loan origination.  The company has been growing its dealer counts (~15%-20%) average and adding to its marketing staff to continue to expand its operations.  This management team is focused on oerating efficiency by consistently reducing costs and returning capital to shareholders. 

Primary competitors are Wells Fargo, Capital One, Citi Bank and the Captive Financing Units of Auto manufacturers all of which have less that 10% share in this industry.  The market is extremely large and CACC continues to grow within the industry: there are approximately 40 million used cars sold annually, 60 million adults with sub-prime credit scores and 60,000 dealerships.

Currently at a 11X PE, despite growing earnings at a 37% CAGR since 2007, the company’s valuation has remained consistently depressed as investors have shied away from this sub-prime lender, with a limited float (<20%).  Many investors misestimate the credit risk of that CACC faces (advances are pooled together, imputed interest in high, so recovery is generally pretty quick for the company as first loss is on the dealer not CACC).  For those investors willing to gain long term exposure to a rebound in the auto industry and CACC should provide significant upside to its current valuation.

Risks:

Consumer protection legislation

Dependent on wholesale funding markets (has asset liability matching on long term debts)

Could experience margin compression once collecting from sub-prime borrowers becomes more difficult