This auto financing company beat analysts’ estimates by $1.23 last quarter, and 10 analysts have increased their EPS forecasts for the company in the past 30 days.
Credit Acceptance Corporation (CACC)
From Validea Hot List Newsletter
Strategy: Growth Investor
Based on: Martin Zweig
Credit Acceptance Corporation (CACC) offers financing programs that enable automobile dealers to sell vehicles to consumers. The Company’s financing programs are offered through a network of automobile dealers. The Company has two Dealers financing programs: the Portfolio Program and the Purchase Program. Under the Portfolio Program, the Company advances money to dealers (Dealer Loan) in exchange for the right to service the underlying consumer loans. Under the Purchase Program, the Company buys the consumer loans from the dealers (Purchased Loan) and keeps the amounts collected from the consumer. Dealer Loans and Purchased Loans are collectively referred to as Loans. As of December 31, 2016, the Company’s target market included approximately 60,000 independent and franchised automobile dealers in the United States. The Company has market area managers located throughout the United States that market its programs to dealers, enroll new dealers and support active dealers.
P/E RATIO: PASS: The P/E of a company must be greater than 5 to eliminate weak companies, but not more than 3 times the current Market P/E because the situation is much too risky, and never greater than 43. CACC’s P/E is 13.31, based on trailing 12 month earnings, while the current market PE is 26.00. Therefore, it passes the first test.
SALES GROWTH RATE: PASS: Another important issue regarding sales growth is that the rate of quarterly sales growth is rising. To evaluate this, the change from this quarter last year to the present quarter (14.3%) must be examined, and then compared to the previous quarter last year compared to the previous quarter (12.5%) of the current year. Sales growth for the prior must be greater than the latter. For CACC this criterion has been met.
The earnings numbers of a company should be examined from various different angles. Three of these angles are stability in the trend of earnings, earnings persistence, and earnings acceleration. To evaluate stability, the stock has to pass the following four criteria.
CURRENT QUARTER EARNINGS: PASS: The first of these criteria is that the current EPS be positive. CACC’s EPS ($7.76) pass this test.
QUARTERLY EARNINGS ONE YEAR AGO: PASS: The EPS for the quarter one year ago must be positive. CACC’s EPS for this quarter last year ($5.09) pass this test.
POSITIVE EARNINGS GROWTH RATE FOR CURRENT QUARTER: PASS: The growth rate of the current quarter’s earnings compared to the same quarter a year ago must also be positive. CACC’s growth rate of 52.46% passes this test.
EARNINGS GROWTH RATE FOR THE PAST SEVERAL QUARTERS: PASS: Compare the earnings growth rate of the previous three quarters with long-term EPS growth rate. Earnings growth in the previous 3 quarters should be at least half of the long-term EPS growth rate. Half of the long-term EPS growth rate for CACC is 15.16%. This should be less than the growth rates for the 3 previous quarters, which are 23.28%, 228.60%, and 30.72%. CACC passes this test, which means that it has good, reasonably steady earnings.
This strategy looks at the rate which earnings grow and evaluates this rate of growth from different angles. The 4 tests immediately following are detailed below.
EPS GROWTH FOR CURRENT QUARTER MUST BE GREATER THAN PRIOR 3 QUARTERS: PASS: If the growth rate of the prior three quarter’s earnings, 92.67%, (versus the same three quarters a year earlier) is greater than the growth rate of the current quarter earnings, 52.46%, (versus the same quarter one year ago) then the stock fails, with one exception: if the growth rate in earnings between the current quarter and the same quarter one year ago is greater than 30%, then the stock would pass. The growth rate over this period for CACC is 52.5%, and it would therefore pass this test.
EPS GROWTH FOR CURRENT QUARTER MUST BE GREATER THAN THE HISTORICAL GROWTH RATE: PASS: The EPS growth rate for the current quarter, 52.46% must be greater than or equal to the historical growth which is 30.32%. CACC would therefore pass this test.
EARNINGS PERSISTENCE: PASS: Companies must show persistent yearly earnings growth. To fulfill this requirement a company’s earnings must increase each year for a five year period. CACC, whose annual EPS growth before extraordinary items for the previous 5 years (from the earliest to the most recent fiscal year) were 10.54, 11.92, 14.28, 16.31 and 29.14, passes this test.
LONG-TERM EPS GROWTH: PASS: One final earnings test required is that the long-term earnings growth rate must be at least 15% per year. CACC’s long-term growth rate of 30.32%, based on the average of the 3, 4 and 5 year historical eps growth rates, passes this test.
INSIDER TRANSACTIONS: PASS: A factor that adds to a stock’s attractiveness is if insider buy transactions number 3 or more, while insider sell transactions are zero. Zweig calls this an insider buy signal. For CACC, this criterion has not been met (insider sell transactions are 818, while insiders buying number 71). Despite the fact that insider sells out number insider buys for this company, Zweig considers even one insider buy transaction enough to prevent an insider sell signal, therefore there is not an insider sell signal and the stock passes this criterion.
John Reese, Validea Hot List Newsletter, www.validea.com, 877-439-0506, August 10, 2018