Credit Acceptance Corp: Earn A 6.1% Annual Yield With These Bonds

| About: Credit Acceptance (CACC)

Summary

As the market currently stands at all-time highs and it is extremely hard to find a decent yield, the bonds of CACC currently have an exceptional risk/reward profile.

The bonds currently offer a 6.1% annual yield while the company has grown its earnings per share for more than 10 years in a row.

While CACC provides financing programs to automobile dealers, it exhibited remarkable growth even during the worst financial crisis of the last 80 years.

After trading within a remarkably narrow range for two years, S&P (NYSEARCA:SPY) recently broke up to new highs. However, as the corporate earnings have declined during the last 4 quarters, many investors are hesitate to purchase stocks at the current levels, as they feel that the potential downside is much greater than the upside. While I believe we are in a secular bull market that still has years to run, I believe that the risk/reward profile of some corporate bonds is much more favorable than the profile of most stocks right now. In this article, I will detail why I recommend purchasing the corporate bonds of Credit Acceptance (NASDAQ:CACC), which expire in February-2021, yield 6.125% and trade around par at the moment. Credit Acceptance provides financing programs to automobile dealers.

First of all, Credit Acceptance has an exceptional record of growing its earnings per share [EPS] and hence even its stock is a great candidate for every portfolio. To be sure, the company has grown its EPS for more than 10 years in a row, an accomplishment that only very few companies can boast of. This consistency reassures its shareholders and bondholders that the company is in a clear growth trajectory and executes perfectly in its business. Even better, the analysts expect the streak to continue, as they forecast 11% EPS growth for this year and 13% EPS growth for next year. Therefore, not only there is no risk on the horizon for the bondholders, but the company is expected to keep thriving for the foreseeable future.

It is also worth noting that the company has an exceptional record of forecasting its collection percentage, i.e., the percent of its auto loans that will be paid in the end. As shown in the table below, the actual collection rate has been very close to the initial forecast during almost every year of the last decade. Only 2009 and 2010 exhibited a significant divergence but, even in those two years, the company was on the safe side, i.e., the actual figures were much better than the initial forecasts.

Forecasted Collection Percentage as of (1)

Current Forecast Variance From

Consumer Loan Assignment Year

June 30,
2016

March 31,
2016

December 31, 2015

Initial
Forecast

March 31,
2016

December 31, 2015

Initial
Forecast

2007

68.1

%

68.1

%

68.1

%

70.7

%

0.0

%

0.0

%

-2.6

%

2008

70.4

%

70.3

%

70.3

%

69.7

%

0.1

%

0.1

%

0.7

%

2009

79.5

%

79.5

%

79.4

%

71.9

%

0.0

%

0.1

%

7.6

%

2010

77.5

%

77.5

%

77.4

%

73.6

%

0.0

%

0.1

%

3.9

%

2011

74.3

%

74.3

%

74.2

%

72.5

%

0.0

%

0.1

%

1.8

%

2012

73.3

%

73.3

%

73.2

%

71.4

%

0.0

%

0.1

%

1.9

%

2013

73.1

%

73.2

%

73.4

%

72.0

%

-0.1

%

-0.3

%

1.1

%

2014

72.0

%

72.2

%

72.6

%

71.8

%

-0.2

%

-0.6

%

0.2

%

2015

67.0

%

67.4

%

67.8

%

67.7

%

-0.4

%

-0.8

%

-0.7

%

2016

66.5

%

66.1

%

-

66.3

%

0.4

%

-

0.2

%

Click to enlarge

The only risk for the bondholders is the increasing competition of the auto loan market, which is the only reason behind the remarkably attractive valuation of the bonds of Credit Acceptance. JP Morgan recently characterized this market as overheated while the results of a competitor of Credit Acceptance, Nicholas Financial (NASDAQ:NICK), have markedly weakened in the last few quarters due to the heating competition of the market. Nevertheless, JP Morgan stated that the market could very easily become much more attractive after a while. Even better for the bondholders of Credit Acceptance, the company exhibited excellent results during the worst financial crisis of the last 80 years. Not only did it not face any problems but it also posted 23% EPS growth in 2008. Investors should always check how a company performed during the last crisis and Credit Acceptance certainly passes that test.

Even if the business conditions extremely deteriorate for Credit Acceptance in the next few years, the company has a great layer of defense. More specifically, if the company enters rough waters, it will reduce or eliminate its aggressive share repurchases and thus save cash to withstand the crisis. As long as the company keeps repurchasing its shares aggressively, the bondholders can rest assured that the company is not facing any problem.

To sum up, Credit Acceptance has been growing its EPS at such a pace that one could even recommend purchasing the stock. I actually made a 70% profit from the stock during 2013-2015 while the stock currently stands above the level I sold it. When a company has such an excellent performance, it is evident that the risk of its bonds is almost negligible. As the market currently stands at all-time highs and it is extremely hard to find a decent yield, the bonds of Credit Acceptance currently have an exceptional risk/reward profile.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am long CACC bonds.