Credit Acceptance surges 4% on earnings beat, $191M buyback
Subprime auto lender exceeds EPS estimates despite revenue miss, repurchases 3.8% of outstanding shares
Credit Acceptance Corporation shares climbed 4.1% to $451.24 on Thursday after the subprime auto lender reported fourth-quarter earnings that significantly exceeded analyst expectations, despite a challenging environment marked by declining loan volumes.
The Southfield, Michigan-based company reported adjusted earnings per share of $11.35, beating Wall Street estimates of $9.45 by 20.1%. The strong earnings performance came alongside a $191.4 million share repurchase program, which represents 3.8% of shares outstanding, demonstrating management's confidence in the company's valuation despite broader economic headwinds.
"These results underscore our resilience," the company's chief executive said in a statement accompanying the regulatory filing, pointing to the company's ability to maintain profitability amid a 9.1% decline in loan volumes and slowing collection rates. The performance was particularly noteworthy given the subprime auto lending sector's sensitivity to economic cycles and consumer credit conditions.
Economic profit, a key metric the company uses to measure true value creation, grew 3.9% to $53.3 million, driven primarily by a lower cost of capital. This metric, which accounts for the cost of equity capital, suggests Credit Acceptance is generating returns above its required rate of return even as loan growth moderates.
Revenue for the quarter missed analyst expectations by 2.2%, reflecting the challenging operating environment. However, the company's ability to translate lower volumes into higher earnings per share through disciplined capital allocation and operational efficiency impressed investors.
The substantial share buyback represents a meaningful deployment of capital, reducing the company's share count by nearly 4% in a single quarter. Credit Acceptance, which trades at 11.6 times trailing earnings, appears to view its current valuation as attractive despite trading near the lower end of its 52-week range of $401.90 to $560.00.
Analysts have assigned the company a consensus target price of $465.50, with three hold ratings and one sell among covering firms, according to market data. The company's 36.8% profit margin and 28.1% return on equity rank among the strongest in the consumer finance sector, though the business model carries significant credit risk.
The subprime auto lending industry has faced mounting pressure as higher interest rates and economic uncertainty have increased payment delinquencies and reduced consumer demand for auto financing. Credit Acceptance's performance suggests it may be weathering these challenges better than some competitors, potentially due to its long-standing relationships with independent dealerships and sophisticated underwriting models.
With 48.9% insider ownership and 71.9% institutional ownership, the company's shareholder base is relatively concentrated, which typically leads to lower trading volumes and can amplify price movements on earnings announcements. Thursday's gain represents one of the stock's strongest single-day performances in recent months.
Looking ahead, investors will be watching for signs of stabilization in loan volumes and improvement in collection rates as economic conditions evolve. The company's ability to maintain strong credit metrics while managing credit risk will be critical to sustaining earnings momentum and justifying continued share repurchases.