Credit Acceptance Corporation - "C is for Collapse"

Executive Summary

The accounting practices used by Credit Acceptance Corporation (CACC) front-load revenue and understate write-offs, thus inflating earnings by 30% to 40% as well as Loans Receivable, which could be overstated by up to 25%. CACC is facing pressure from regulators, which could potentially result in a requirement to re-state financial accounts, fines and / or restitution to customers.

CACC Thesis (link)

CACC Presentation (link)

CarMax Auto Owner Trust securitisation performance reports (link)

Recent Events

-     On Wednesday, January 31st, $CACC held its Q4 earnings call, where management (inadvertently) admitted to fudging the numbers (link).  

-     On Friday, February 2nd, after markets close, $CACC published the following press release: 

o   "On November 20, 2017 we received a second civil investigation demand from the Office of the Attorney General of the Commonwealth of Massachusetts seeking updated information on its original civil investigation demand, dated December 4, 2014, additional information related to the Company's origination and collection of consumer loans, and information regarding securitization activities. We are cooperating with the inquiry and cannot predict the eventual scope, duration or outcome at this time. As a result, we are unable to estimate the reasonably possible loss or range of reasonably possible loss arising from this investigation."

-     On Friday, February 9th, after markets close, $CACC published 2017 Annual Accounts (10-K).

-     On Friday, February 9th, after markets close, PlainSite published the much anticipated Part II report on $CACC (link). The note is an impressive example of investigative research, and highly complementary with my own work. I would highlight three points from the PlainSite report:

o   The commentary on page 35 on the poor incentives of companies that engage in asset "round-tripping" and the increased risk of fraud; 

o   The arguments on page 44 explaining how "Effectively, the company could quietly use the Purchase Program as a “bad bank"; and

o   The conclusion reached in page 45 that "either Credit Acceptance could earn more profit across the entire financial sector with its “proprietary credit scoring system,” or the reported figures are being manipulated."

I would add "C is for Credit Acceptance Corporation" 

Disclaimer

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