Credit Acceptance (CACC)

Auto financing company Credit Acceptance (NASDAQ:CACC) announced better-than-expected revenue in Q3 CY2025, with sales up 52.3% year on year to $582.4 million. Its non-GAAP profit of $10.28 per share was 8.8% above analysts’ consensus estimates.

Company Overview

Founded in 1972 by Donald Foss to serve customers overlooked by traditional lenders, Credit Acceptance (NASDAQ:CACC) provides auto financing solutions that enable car dealers to sell vehicles to consumers with limited or impaired credit histories.

Auto loan providers finance vehicle purchases for consumers and businesses. They benefit from steady vehicle demand, higher average vehicle prices requiring financing, and opportunities in used car financing. Headwinds include economic cycle sensitivity affecting repayment ability, competition from dealership financing programs, and potential disruption from vehicle subscription services reducing traditional ownership models.

Credit Acceptance competes with other subprime auto lenders including Santander Consumer USA (private), CarMax Auto Finance (NYSE:KMX), and regional banks that offer subprime auto loans. The company also faces competition from traditional auto finance companies that have expanded into the non-prime market such as Ally Financial (NYSE:ALLY) and Capital One Auto Finance (NYSE:COF).

Examining a company’s long-term performance can provide clues about its quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, Credit Acceptance grew its revenue at a sluggish 4.1% compounded annual growth rate. This fell short of our benchmark for the financials sector and is a poor baseline for our analysis.

Long-term growth is the most important, but within financials, a half-decade historical view may miss recent interest rate changes and market returns. Credit Acceptance’s annualized revenue growth of 9.5% over the last two years is above its five-year trend, suggesting some bright spots. Note: Quarters not shown were determined to be outliers, impacted by outsized investment gains/losses that are not indicative of the recurring fundamentals of the business.

This quarter, Credit Acceptance reported magnificent year-on-year revenue growth of 52.3%, and its $582.4 million of revenue beat Wall Street’s estimates by 15.6%.

Revenue growth is one major determinant of business quality, and the efficiency of operations is another. For Auto Loan companies, we look at pre-tax profit rather than the operating margin that defines sectors such as consumer, tech, and industrials.

Financials companies manage interest-bearing assets and liabilities, making the interest income and expenses included in pre-tax profit essential to their profit calculation. Taxes, being external factors beyond management control, are appropriately excluded from this alternative margin measure.

Over the last four years, Credit Acceptance’s pre-tax profit margin has risen by 34.2 percentage points, going from 64.8% to 30.6%. Luckily, it seems the company has recently taken steps to address its expense base as its pre-tax profit margin expanded by 5.3 percentage points on a two-year basis.

Credit Acceptance’s pre-tax profit margin came in at 25.6% this quarter. This result was 2.3 percentage points worse than the same quarter last year.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Credit Acceptance’s flat EPS over the last five years was below its 4.1% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded due to factors such as interest expenses and taxes.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

For Credit Acceptance, its two-year annual EPS declines of 5.4% show its recent history was to blame for its underperformance over the last five years. These results were bad no matter how you slice the data.

In Q3, Credit Acceptance reported adjusted EPS of $10.28, up from $8.79 in the same quarter last year. This print beat analysts’ estimates by 8.8%. Over the next 12 months, Wall Street expects Credit Acceptance’s full-year EPS of $38.36 to grow 12.5%.

Financial firms generate earnings through diverse intermediation activities, making them fundamentally balance sheet-driven enterprises. Investors focus on balance sheet quality and consistent book value compounding when evaluating these multifaceted financial institutions.

This explains why tangible book value per share (TBVPS) is a premier metric for the sector. TBVPS provides concrete per-share net worth that investors can trust when evaluating companies with complex, multi-faceted business models. On the other hand, EPS is often distorted by the diverse nature of operations, mergers, and various accounting treatments across different business units. Book value provides clearer performance insights.

Credit Acceptance’s TBVPS grew at a sluggish 2% annual clip over the last five years. The last two years show a similar trajectory as TBVPS grew by 2.8% annually from $135.35 to $142.97 per share.

Return on equity, or ROE, quantifies bank profitability relative to shareholder equity - an essential capital source for these institutions. Over extended periods, superior ROE performance drives faster shareholder wealth compounding through reinvestment, share repurchases, and dividend growth.

Over the last five years, Credit Acceptance has averaged an ROE of 26.7%, exceptional for a company operating in a sector where the average shakes out around 10% and those putting up 25%+ are greatly admired. This is a bright spot for Credit Acceptance.

The debt-to-equity ratio is a widely used measure to assess a company's balance sheet health. A higher ratio means that a business aggressively financed its growth with debt. This can result in higher earnings (if the borrowed funds are invested profitably) but also increases risk.

If debt levels are too high, there could be difficulties in meeting obligations, especially during economic downturns or periods of rising interest rates if the debt has variable-rate payments.

Credit Acceptance currently has $6.37 billion of debt and $1.58 billion of shareholder's equity on its balance sheet, and over the past four quarters, has averaged a debt-to-equity ratio of 3.9×. We think this is dangerous - for a financials business, anything above 3.5× raises red flags.

We were impressed by how significantly Credit Acceptance blew past analysts’ revenue expectations this quarter. We were also glad its EPS outperformed Wall Street’s estimates. Zooming out, we think this was a solid print. The stock remained flat at $452.38 immediately after reporting.

Updated: December 3, 2025 at 11:03 PM EST

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Credit Acceptance.

Credit Acceptance falls short of our quality standards. For starters, its revenue growth was uninspiring over the last five years. And while its stellar ROE suggests it has been a well-run company historically, the downside is its declining pre-tax profit margin shows the business has become less efficient. On top of that, its weak EPS growth over the last five years shows it’s failed to produce meaningful profits for shareholders.

Credit Acceptance’s P/E ratio based on the next 12 months is 11.6x. At this valuation, there’s a lot of good news priced in - we think there are better opportunities elsewhere.

Wall Street analysts have a consensus one-year price target of $458 on the company (compared to the current share price of $473.95), implying they don’t see much short-term potential in Credit Acceptance.