Wednesday, May 17, 2017

"The Father of Subprime Auto Loans Is Cashing Out" (CACC)

I am reminded of one of the most astounding bits of analysis* in at least 85 years, notes below.

From Casey Research, May 9:

Don Foss is walking away from his empire.
You’ve probably never heard of Foss. But he’s likely the world’s richest used car salesman. He was also a pioneer of the subprime auto loan market.

These are car loans made to people with bad credit. Today, the subprime auto loan market is worth more than $175 billion. But this market didn’t even exist in the 1960s.

Back then, car companies like General Motors and Ford would only lend money to folks with good credit. It was simply too risky to lend money to people with bad credit.

But Foss saw opportunity where others saw only danger. He started selling cars on credit to people with shaky finances.

Was it risky? Sure. But Foss could charge these customers sky-high interest rates. No one else was lending money, after all.

Then, in 1972, Foss launched Credit Acceptance (CACC) to handle financing and debt collection for his growing used car empire.

Today, Credit Acceptance is a major player in the U.S. subprime auto loan market. It’s worth $4.2 billion. And business has never been better.

• Last year, Credit Acceptance did $872 million in sales…
That’s 16% more than it did in 2015, and quadruple what it did a decade ago.
And yet, Foss wants out.

In January, he stepped down as chairman of Credit Acceptance. A month later, he sold $128 million worth of shares in the company. According to Bloomberg Markets, Foss wouldn’t say why he sold his shares.

To be fair, Foss has been at the top of the subprime auto lending business for five decades. If anyone’s earned the right to hang up their boots and relax, it’s him.
Still, you have to wonder why Foss would step down now. After all, Credit Acceptance is coming off its best year ever.

In short, his departure raises serious questions about the health of Credit Acceptance. But that’s certainly not the only reason to be nervous about the company.

• Sharks are circling the company…
Right now, 48% of Credit Acceptance’s outstanding shares are “short.” This means a lot of people are betting that the stock will crash.

According to Bloomberg, Credit Acceptance is the third most shorted stock in the Russell 1000 Index, which tracks large and midsize companies.

Other major subprime auto lenders are also flashing danger…

• Ally Financial (ALLY) just reported a 17% drop in its first-quarter net income…
Ally, one of the biggest subprime auto lenders, blamed the bad quarter on a 6.7% decline in used car prices.

Santander Consumer (SC), another big subprime auto lender, saw its profits fall 31% last quarter. Santander has also cut ties with more than 800 car dealerships since 2015 due to “performance-related issues.” And it just reported a 21% drop in subprime loan originations....

Here's the last year of action in CACC via FinViz, $212.32, down $2.79 on the day:

CACC Credit Acceptance Corporation daily Stock Chart

*On August 10, 2007 we posted:

The Day the Music Died--The Mortgage Business 
May 7, 2006
Press Release:
WACHOVIA TO ACQUIRE GOLDEN WEST FINANCIAL, NATION'S MOST ADMIRED AND 2ND LARGEST SAVINGS INSTITUTION "...Herbert M. Sandler, Golden West chairman and chief executive officer, commented, "I’ve been a keen observer of the market and the mortgage and banking industries for nearly 40 years...."

The San Francisco Chronicle covered it as a human interest story May 9.

Why Sandlers sold their S&L
Wachovia's deal for Golden West called a good fit

While Sandler talked animatedly about her favorite causes, she broke down talking about her feelings about closing a book that's represented more than half of her life.

"I can't talk about it without crying," she said. "Some part of me certainly is very emotional."

On May 10, 2006 India Daily said:
Sell of Golden West Financial to Wachovia signifies burst of housing bubble
Emphasis in the original. 
I don't know who the analyst is and the link is dead but the Internet Archive Wayback Machine happened to catch the intro to the story:

Sell of Golden West Financial to Wachovia signifies burst of housing bubble
Media Release
May 10, 2006
The decision to sell Golden West Financial to Wachovia for about $25 billion in mostly stock and some cash may turn out to be a harbinger of the end of the housing bubble....