Earnings call transcript: Credit Acceptance Q1 2025 sees stock rise despite EPS miss

Credit Acceptance Corporation (CACC) reported its first-quarter earnings for 2025, revealing an earnings per share (EPS) of $9.35, falling short of the $9.66 forecast. However, the company exceeded revenue expectations, reporting $571.1 million against a forecast of $570.97 million. This mixed performance led to a 2.58% increase in after-hours trading, with shares rising to $500. According to InvestingPro data, the company maintains strong profitability with a 92% gross margin and analysts expect continued growth in net income this year. InvestingPro subscribers have access to 5 additional key insights about CACC’s financial health and growth prospects.

Key Takeaways

• EPS missed expectations, coming in at $9.35 versus the $9.66 forecast.
• Revenue slightly exceeded forecasts at $571.1 million.
• The loan portfolio reached a record $9.1 billion, up 10% year-over-year.
• Stock rose by 2.58% in after-hours trading.
• Continued investment in technology and innovation.

Company Performance

Credit Acceptance Corporation demonstrated robust growth in its loan portfolio, which reached a record $9.1 billion, marking a 10% increase from the same quarter last year. Despite a slight decrease in adjusted yield from 18.4% to 18%, the company maintained a strong focus on supporting its network of dealers and enhancing its technology infrastructure. The company’s financial health appears solid, with InvestingPro analysis showing a strong current ratio of 5.17, indicating liquid assets well exceed short-term obligations.

Financial Highlights

• Revenue: $571.1 million, slightly above the forecast.
• Earnings per share: $9.35, missing the forecast by $0.31.
• Loan portfolio: $9.1 billion, up 10% year-over-year.
• Dealer holdback payments: $68 million.

Earnings vs. Forecast

Credit Acceptance’s earnings per share missed analyst expectations by $0.31, while revenue slightly exceeded forecasts by $130,000. This mixed result reflects a challenge in maintaining profitability amidst a competitive market and economic uncertainties.

Market Reaction

Following the earnings announcement, Credit Acceptance’s stock rose by 2.58% in after-hours trading, reaching $500. This positive movement suggests that investors may be focusing on the company’s revenue beat and strategic investments rather than the EPS miss. Based on InvestingPro’s Fair Value analysis, the stock appears slightly overvalued at current levels. For investors interested in finding undervalued opportunities, check out the Most Undervalued Stocks list, exclusively available to Pro subscribers.

Outlook & Guidance

The company expressed caution regarding economic volatility, including potential impacts from inflation, tariffs, and vehicle price fluctuations. It plans to maintain a conservative cash position while continuing investments in technology and operations. The company’s resilience is reflected in its strong financial metrics, with a return on equity of 14% and impressive free cash flow yield of 20%. Discover more detailed insights and comprehensive analysis in CACC’s Pro Research Report, available exclusively to InvestingPro subscribers, along with 1,400+ other top US stocks.

Executive Commentary

CEO Ken Booth emphasized the company’s strategic pricing, stating, "We price our loans with a big margin of safety so that they’ll most likely still produce a good result regardless of those economic factors." CFO Jay Martin added, "Our current forecast right now represents our best estimate of how our loans are going to perform."

Risks and Challenges

• Economic volatility, including inflation and tariffs, could impact future performance.
• Decreased market share in subprime financing.
• Increased competition and lower advance rates may affect growth.
• Potential impacts from regulatory changes and lawsuits.

Q&A

During the earnings call, analysts inquired about the provision for forecast changes and the slower cash flow timing. The company also addressed the withdrawal of a CFPB lawsuit and discussed challenges in market volatility and forecasting.

Full transcript - Credit Acceptance Corporation (CACC) Q1 2025:

Conference Operator: Good day, everyone, and welcome to the Credit Acceptance Corporation First Quarter twenty twenty five Earnings call will be made available on Credit Acceptance’s website. At this time, I would now like to turn the call over to Credit Acceptance’s Chief Financial Officer, Jay Martin.

Jay Martin, Chief Financial Officer, Credit Acceptance Corporation: Thank you. Good afternoon, and welcome to the Credit Acceptance Corporation First Quarter twenty twenty five Earnings Call. As you read our news release posted on the Investor Relations section of our website at ir.creditacceptance.com and 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 say 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 first quarter results.

Ken Booth, Chief Executive Officer, Credit Acceptance Corporation: Thanks, Jay. Overall, we had another mixed quarter as it related to collections and originations, two key drivers of our business. Collections improved sequentially this quarter with only our 2022, ’20 ’20 ’4 and 2025 vintages modestly underperforming our expectations, while our other vintages were stable during the quarter. Overall forecasted net cash flows declined by 0.2% or $21,000,000 which was our smallest decline of the last eight quarters. During the quarter, our loan portfolio reached a new record high of $9,100,000,000 on an adjusted basis, up 10% from Q1 last year, although we experienced a decline in unit dollar volume growth.

Our market share in our core segment of used vehicles financed by subprime consumers was 5.2% for the first two months of the year compared to 6% for the same period in 2024. Our unit volume was likely impacted by our Q3 twenty twenty four scorecard change that has resulted in lower advance rates and increased competition. Beyond these two key drivers, we continued making progress during the quarter towards our mission of maximizing intrinsic value and positively changing the lives of our five key constituents: dealers, consumers, team members, investors and the communities we operate in. We do this by providing a valuable product that enables dealers to sell vehicles to consumers regardless of their credit history. This allows dealers to make incremental sales to roughly 55% of adults with other than prime credit.

For these adults, it enables them to obtain a vehicle to get to their jobs, take their kids to school, etc. It also gives them the opportunity to improve or build their credit. Our customers are people like Vivien from Maryland. Vivien is an elementary school assistant, a role that requires her to consistently and timely show up for children with disabilities and special needs. After her vehicle was towed in an accident, she was left with out of reliable transportation.

She needed a new vehicle, but worried about her ability to secure financing due to her poor credit history. Her fears were confirmed when she was turned down for financing multiple times. Discouraged, but not defeated, she found a dealership who approved her to finance a vehicle through Credit Acceptance. Vivian described the moment she was approved for financing as a turning point in her life, with a reliable vehicle to regain her independence. Vivian plans to use credit acceptance again when it comes time to finance another vehicle, knowing she would be supported by a team that listens and puts her at ease.

During the quarter, we financed over 100,000 contracts for our dealers and consumers. We collected $1,400,000,000 overall and paid $68,000,000 in dealer holdback and accelerated dealer holdback to our dealers. We enrolled sixteen seventeen dealers and now have our second highest quarterly number of active dealers with 10,789 dealers. From an initiative perspective, we’ve made progress with our go to market approach with the goal of supporting our dealers faster more effectively than ever before. This requires teamwork, attention to detail, and an interim process that attempts to make improvement every step of the way.

We also continue to invest in the technology team. We remain focused on modernizing both our key technology architecture and how our teams work to support this goal. During the quarter, we were named the top workplace USA award winner for

Jay Martin, Chief Financial Officer, Credit Acceptance Corporation: the fifth year in a

Ken Booth, Chief Executive Officer, Credit Acceptance Corporation: row with the number two ranking among companies of our size. Last year, were recognized with a record 13 workplace awards, and we continue to focus on making our amazing workplace even better. We support our team members in making a difference to what makes a difference to them, raising money for five different charitable organizations that were selected by our team members. Now, Jay Martin and I will take your questions, along with Doug Foss, our Chief Treasury Officer Jay Brinkley, our Senior Vice President and Treasurer and Jeff Sutar, our Vice President and Assistant Treasurer.

Conference Operator: Thank you. As a reminder, to ask a question, please press 11 on your telephone Our first question comes from Moshe Orenbuch with TD Cowen. You may proceed.

Moshe Orenbuch, Analyst, TD Cowen: Great, thanks. I was sort of hoping that we could talk a little bit about these forecast changes. As you mentioned, this was the smallest one in a while and yet you still had a $76,000,000 portion of your GAAP provision related to it. And unlike last quarter when you had a larger forecast change, you had an increase in the adjusted yield and this quarter it went down. So maybe could you talk about how we should be thinking about those two items both in this quarter and going forward?

Sure. First, I’ll talk about

Jay Martin, Chief Financial Officer, Credit Acceptance Corporation: your provision question, the $76,000,000 provision for forecast changes. So what that is, is the impact of of us decreasing the present value of future cash flows, and that has two components. There’s the changes on discounted cash flows, which is the $21,000,000 decrease that you referenced and then there’s also the slower cash flow timing on our total forecast net cash flows which is approximately $2,000,000,000 It doesn’t take much of a slowing on the twelve day of the cash flows to increase that provision. So that’s what drove the provision for forecast changes for the quarter. Now on your point on the adjusted yield, there’s a couple of things going on there.

So if you look at page 10 of our earnings release, you’ll notice we added a new metric there, which is adjusted finance charges as a percentage of our adjusted loans receivable. And what you’ll see there is similar to last quarter, we did see an increase in the yield from the prior quarter and that’s due to the yield on the current quarter origination, the expected yields on those new originations more than offsetting the decline due to the underperformance of the loans on the entire portfolio. So we did see the adjusted yield increase slightly from Q4. What you’re seeing as adjusted revenue as a percentage of adjusted capital, that did decrease from 18.4% last quarter to 18% this quarter. What was driving that a decrease there where adjusted yield went off was due to the $500,000,000 of cash cash equivalents we have on our balance sheet, higher than what we normally have just due to the timing of some recent debt issuances coupled with slower loan growth.

So we don’t expect to have cash and cash equivalents at that level, but that drove our adjusted capital growing faster than adjusted loans.

Moshe Orenbuch, Analyst, TD Cowen: Got it. And just to clarify on the GAAP provision, you I guess that means the cash flows were slowing somewhat in addition to that $21,000,000 less in just nominal amounts, right?

Jay Martin, Chief Financial Officer, Credit Acceptance Corporation: That’s correct. It continues to grow prepayments coming lower than historical levels or

Ken Booth, Chief Executive Officer, Credit Acceptance Corporation: at least

Jay Martin, Chief Financial Officer, Credit Acceptance Corporation: lower than what our forecast is expecting. We continue to see a slight decline in the timing or slowing the timing.

Moshe Orenbuch, Analyst, TD Cowen: Yeah. And in the opening comments, you talked a little bit about the volume. I noticed that you also had a slightly higher percentage both purchased loans as opposed to portfolio loans. I mean, I guess that would sorta, I mean, I guess I’m not sure exactly what to make of that. Maybe you could kinda expand on that a little bit.

But I mean, it feels like, again, maybe at the dealer, more competition at the dealer. Is that what that would reflect?

Ken Booth, Chief Executive Officer, Credit Acceptance Corporation: I think it’s pretty comparable. I think it’s a modest change. You know, it was less than two percentage points difference. I I would say it’s just a little more randomness

Jay Martin, Chief Financial Officer, Credit Acceptance Corporation: or mix alone, but I don’t necessarily think it means

Moshe Orenbuch, Analyst, TD Cowen: Gotcha.

Ken Booth, Chief Executive Officer, Credit Acceptance Corporation: Due to competition or anything necessarily.

Moshe Orenbuch, Analyst, TD Cowen: Okay. Alright. Thanks very much.

Conference Operator: Thank you. Our next question comes from Robert Wildhack with Autonomous Research. You may proceed.

Robert Wildhack, Analyst, Autonomous Research: In the past, you’ve talked a decent amount about how forecasting models can be less accurate in periods of volatility. And I think we could all agree that the broader environment today looks to be a volatile one. So I guess, should we expect more volatility around forecasted collections going forward? Or how are you thinking about the accuracy of forecasts moving through ’twenty five given all the volatility in the broader market today?

Jay Martin, Chief Financial Officer, Credit Acceptance Corporation: Yeah, so our current forecast right now represents our best estimate of how our loans are going to perform. So predicting global performance is difficult and can’t predict the future any better than anyone else. So we feel like we have a pretty good track record.

Ken Booth, Chief Executive Officer, Credit Acceptance Corporation: But there are a few things that could make it more

Jay Martin, Chief Financial Officer, Credit Acceptance Corporation: challenging going forward. First would be the impact of inflation. It’s declined some recently, but things still cost a

Ken Booth, Chief Executive Officer, Credit Acceptance Corporation: lot more than it did

Jay Martin, Chief Financial Officer, Credit Acceptance Corporation: three years ago, and then we don’t know what the impact that tariffs could have on inflation, so that’s likely to increase inflation. And we also know that vehicle prices could decline, that does seem like it’s minimized by the impact of

Robert Wildhack, Analyst, Autonomous Research: Okay. And then kind of on a similar point, the 2022 vintage and performance there was marked by a period of elevated inflation, whether it’s the 24, 20 five or even 26 inches, those are likely to be fined by tariffs and maybe a recession. Is the source of the volatility a big deal or is all volatility the same? Like is inflation different, inflation induced volatility different from a tariff related volatility?

Jay Martin, Chief Financial Officer, Credit Acceptance Corporation: Well, it’s tough to say exactly. It all has an impact depends on the extent of the impact of inflation. Things like vehicle prices have less of an impact on our forecasted collection rates, so we just really don’t know at this point, again what we have out there is our best estimates, I hope we know today. We also know the ’twenty two loans. Beyond just inflation, there are some other factors on why those have underperformed.

You know, it’s a couple of those would be that the loans were originated in a very competitive period. It’s generally just first loan performance, consumers purchase vehicle at peak valuations, vehicle prices subsequently declined, and then as you mentioned inflation. So we also know, we saw in the ’twenty two lows, not unusual compared to what we see others. Okay.

Conference Operator: Just to jump in there too,

Ken Booth, Chief Executive Officer, Credit Acceptance Corporation: you know, that’s the reason we can’t predict when the volatility is going to come or what’s going to be more volatile, and that’s why we price our loans with a big margin of safety so that they’ll most likely still produce a good result regardless of those economic factors.

Robert Wildhack, Analyst, Autonomous Research: Got it. And then just quick, you touched on the cash and hear you that, this quarter was impacted by the recent debt issuance. But more broadly, like you used to run with a single digit million cash number and it’s been up in the hundreds for the last three quarters. So why the longer term increase there?

Jay Brinkley, Senior Vice President and Treasurer, Credit Acceptance Corporation: Well, mean, this is Jay Brinkley. Similar to what we said last quarter, we took a fairly conservative stance going into q4 with the unknowns related to the election and what impact it would have on the capital markets. Really, we saw no reason to change that stance. There’s a lot up in the air, obviously, We were pretty active during the quarter as you saw. We refi ed our 26 notes and upsized those by 100,000,000.

We also closed the securitization at the end of the quarter. I think in terms of timing, we feel pretty good about getting in and out of the market what we did. Things have gotten fairly volatile out there and feels feels good to be in the cash position that we are right now rather than having to issue it to a volatile capital market environment.

Moshe Orenbuch, Analyst, TD Cowen: Okay. Thank you.

Jay Martin, Chief Financial Officer, Credit Acceptance Corporation: Thank you.

Conference Operator: Our next question comes from John Rowan with Janney. You may proceed.

John Rowan, Analyst, Janney: Good afternoon. Just curious, why did you guys decide to accelerate dealer holdback?

Doug Foss, Chief Treasury Officer, Credit Acceptance Corporation: You know, this is Doug. I can handle this. You know, what we’re trying to do with dealer holdback in general is incentivize dealer behavior primarily at the time of origination because they get part of their compensation is dealer holdback that is based over time on the performance of the loan. So you know, the problem you have with that is you’re trying to incentivize dealer behavior today with additional profitability that will occur thirty, thirty six, forty two months from the point of origination. So we accelerated dealer holdback, and we’ve been doing this for many, many years to try to create a better linkage between dealer behavior at origination in that collection related profit or dealer holdback.

John Rowan, Analyst, Janney: Okay. I guess just one accounting question. There’s a pretty big jump in salaries and wages. Is that a good run rate going forward?

Jay Martin, Chief Financial Officer, Credit Acceptance Corporation: It depends. Are you are you comparing salaries and wages to q four of last year or q one of last year?

John Rowan, Analyst, Janney: I’m just looking at the 88,600,000 reported.

Jay Martin, Chief Financial Officer, Credit Acceptance Corporation: Yeah. I would say there’s some seasonal improvement. There’s some seasonal events in q one that tends to have operating expenses higher, has to do with our our payroll taxes, volume that’s seasonally higher loan unifying seasonally higher in Q1, which impacts sales commissions. We also have some higher fringe benefits in Q1. If look at Q1 versus last year, you will see we gained some operating leverage as this decline in the size of average capital.

John Rowan, Analyst, Janney: Okay. And then you mentioned something earlier. I just want to make sure I heard it correctly. You said you had a 5.2% market share versus 6% last year, what time frame was that? And you gave, you talked about something about Advantage score, just can you kind of repeat what you said, so I have it.

Ken Booth, Chief Executive Officer, Credit Acceptance Corporation: Yeah, the 5.2% was for the first two months of the year, because we don’t have data for March yet, and then the 6% for 2024 was also the same period. So and what was the second part of your question again?

John Rowan, Analyst, Janney: And you mentioned something about advantage scores being the reason for that. Can you just go over that again?

Ken Booth, Chief Executive Officer, Credit Acceptance Corporation: I think maybe I didn’t speak clearly or maybe you heard it wrong, but what I said was our unit volume was likely impacted by our Q3 twenty twenty four scorecard change that resulted in lower advance rates and also increased competition.

John Rowan, Analyst, Janney: Okay. All right. Thank you very much.

Conference Operator: Thank you. Our next question comes from Jordan Hemmelitz with Philadelphia Financial. You may proceed.

Jordan Hemmelitz, Analyst, Philadelphia Financial: Thanks, guys. A couple of questions. One is the CFPB recently dropped its lawsuit against you guys. Can you give a sense of how much of legal fees were spent in the first quarter on that case that won’t be repeated?

Jay Martin, Chief Financial Officer, Credit Acceptance Corporation: No, we don’t comment on legal costs unless they’re material to our financials. So we won’t comment on that beyond what we’ve disclosed in our filings. What I would do though is just reiterate what we put in a release last week that we’re pleased with the TFPB’s decision to withdraw from the case as it should limit the scope to New York consumers only. As we’ve outlined in our motion to dismiss, this lawsuit seeks to create new law and litigation with certain legal theories in place with established statutes. But we won’t count in legal reserves or legal expenses.

Jordan Hemmelitz, Analyst, Philadelphia Financial: Whatever would be that would be coming down. My next question is, you came closer and closer to not providing or writing down older pools, and you spent $76,300,000 in the quarter. If I just tax effect that number, it’s about 5 and a half dollars. So would I think about your earnings power being closer to, like, 13 and a half, 14 dollars today if there were no changes for write backs to older pools?

Ken Booth, Chief Executive Officer, Credit Acceptance Corporation: We think the best way to look

Jay Martin, Chief Financial Officer, Credit Acceptance Corporation: at our financial results is looking at our adjusted financial results. So I would use that as your proxy.

Jordan Hemmelitz, Analyst, Philadelphia Financial: Okay. And were there any other one time things that you’re not going to break out the legal fees? Like you’ve been spending a lot on IT and other things that may come down going forward?

Ken Booth, Chief Executive Officer, Credit Acceptance Corporation: I mean, we have had elevated levels of investment in the business in recent years. You know, lot of these have been foundational, trying to get things like sufficient talent density, changing org design, modernizing our tech stack. Yeah I

Jay Martin, Chief Financial Officer, Credit Acceptance Corporation: think maybe at some point they would come down,

Ken Booth, Chief Executive Officer, Credit Acceptance Corporation: but once we kind of modernize our tech stack we’re then looking at making a lot of changes and trying to improve our products. So I don’t foresee in the relatively near future the elevated levels coming down, although I will say we hope to start to see more of a

Jay Martin, Chief Financial Officer, Credit Acceptance Corporation: return on them once we get past the foundational stage.

Jordan Hemmelitz, Analyst, Philadelphia Financial: Okay, thank you.

Conference Operator: Thank you. With no further questions in the queue, I would like to turn the conference back over to Mr. Martin for any additional or closing remarks.

Jay Martin, Chief Financial Officer, Credit Acceptance Corporation: 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 ircreditacceptance dot com. We look forward to talking to you again next quarter. Thank you.

Conference Operator: Thank you. Once again, this does conclude today’s conference. We thank you for your participation.

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