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Credit Acceptance(CACC-Q)
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Why Credit Acceptance Stock Fell 17.9% This Week

Motley Fool - Fri Jan 6, 2023

What happened

Credit Acceptance(NASDAQ: CACC) had a rough week, as its stock price fell 17.9% from last Friday's close through 12:30 p.m. ET on Friday, according to S&P Global Market Intelligence. The stock is trading at about $390 per share and is down about 39% over the past year, as of Jan. 6.

Overall, it was a flat week for the markets, as the S&P 500 was up 1%, the Dow Jones Industrial Average also gained 1%, and the Nasdaq Composite was up 0.2% for the week, as of 12:30 p.m. ET.

So what

Credit Acceptance got hit with a lawsuit by the New York Attorney General's Office and the Consumer Financial Protection Bureau (CFPB), causing its stock price to spiral lower.

The CFPB and NYAG sued Credit Acceptance, a subprime auto lender to lower-income consumers, alleging that, among other things, the company hid costs in its loan agreements.

"Credit Acceptance obscured the true cost of its loans to car buyers, leading to severe financial distress for borrowers and subjecting them to aggressive debt collection tactics on loans its own systems predicted that borrowers can't afford to repay," CFPB Director Rohit Chopra said in a press release. "The CFPB and the New York Attorney General seek to halt Credit Acceptance's illegal practices and make consumers whole."

The stock price dropped about 13.4% on the news.

Now what

Conditions have not been ideal for auto lenders, and Credit Acceptance was not immune. Earnings dropped 65% in the third quarter as provision for credit losses jumped to $189 million, up from an $8.3 million reserve in the third quarter of 2021, due to harsher economic conditions.

Also, operating expenses rose 7.1% due to an increase in salary and compensation from adding staff in the technology department and higher sales and marketing expenditures. In addition, there was a 4.9% decrease in finance charges related to a decline in the average loan balance.

Conditions are not expected to improve much, if at all, given the economic headwinds and the impact they could have on consumers. In addition, the company now has this lawsuit hanging over its head.

The stock is pretty cheap, with a forward price-to-earnings ratio of about 10, and it has a high operating margin of about 65%. But given the environment and legal concerns, it may be best to monitor the stock and look for updates and better visibility in its fourth-quarter and year-end earnings report, which comes out on Jan. 30.

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Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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