To understand whether Credit Acceptance is attractively priced today, you first need to know what is driving market expectations around the stock, not just where the share price sits.
The share price closed at US$461.25, with a 7.7% decline over the last 7 days and a 4.7% decline over the last 30 days, while the year to date return is 1.6% and the 1 year return is an 8.1% decline alongside 12.8% and 28.2% returns over 3 and 5 years.
Recent coverage of Credit Acceptance has focused on how market sentiment and credit conditions could influence lenders in the auto finance space, giving context to these short term moves in the share price. This type of news can highlight shifting views on risk, regulation or funding costs, all of which feed directly into how investors think about what the stock is worth.
On Simply Wall St's 6 point valuation checklist, Credit Acceptance scores 2 out of 6. The next step is to look at how different valuation approaches judge that score and then finish by considering an even broader way to think about valuation beyond the usual models.
Credit Acceptance scores just 2/6 on our valuation checks. See what other red flags we found in the full valuation breakdown.
Approach 1: Credit Acceptance Excess Returns Analysis
The Excess Returns model looks at how much profit a company earns over and above the return that shareholders require, based on the equity cost, and then capitalizes those extra profits into an intrinsic value per share.
For Credit Acceptance, the model uses a book value of about $142.66 per share and a stable book value estimate of $136.25 per share, both drawn from median figures over the past 5 years. On that equity base, the company has a stable EPS estimate of $26.37 per share, sourced from the median return on equity, with an average return on equity of 19.36%.
The required return for shareholders is put at $14.27 per share, so the excess return comes out at $12.10 per share. Using these inputs, the Excess Returns model arrives at an estimated intrinsic value of about $307.52 per share.
Against the recent share price of $461.25, this implies the stock is about 50.0% overvalued according to this framework.
Result: OVERVALUED
Our Excess Returns analysis suggests Credit Acceptance may be overvalued by 50.0%. Discover 49 high quality undervalued stocks or create your own screener to find better value opportunities.
Approach 2: Credit Acceptance Price vs Earnings
For profitable companies like Credit Acceptance, the P/E ratio is a straightforward way to relate what you pay for the stock to the earnings it generates. It helps you see how much the market is currently willing to pay for each dollar of profit.
What counts as a normal or fair P/E depends on what investors expect for future growth and how they view the risks. Higher growth or lower perceived risk can justify a higher P/E, while lower growth or higher perceived risk tends to line up with a lower P/E.
Credit Acceptance currently trades on a P/E of 11.69x. That sits above the Consumer Finance industry average P/E of 7.48x, but below the peer group average of 35.22x. Simply Wall St also provides a proprietary “Fair Ratio” of 15.82x, which estimates an appropriate P/E given factors such as earnings growth, industry, profit margins, market cap and identified risks.
This Fair Ratio can be more informative than a simple peer or industry comparison because it adjusts for company specific characteristics rather than assuming all lenders deserve the same multiple. Comparing 11.69x to the Fair Ratio of 15.82x points to Credit Acceptance trading below that model based estimate.
Result: UNDERVALUED
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Upgrade Your Decision Making: Choose your Credit Acceptance Narrative
Earlier it was mentioned that there is an even better way to think about valuation, and that is where Narratives come in. Simply Wall St offers Narratives on the Community page so you can attach a clear story about Credit Acceptance to your own revenue, earnings and margin assumptions, link that story to a financial forecast and a fair value, then compare that fair value to the current share price to decide whether the stock looks attractive or not. Narratives have the added benefit of updating automatically when new earnings or news arrive. As a result, different investors can reasonably land on very different fair values. For example, one Narrative might lean on analysts assuming revenue growth of 56.2% a year to reach US$4.5b of revenue and US$504.0m of earnings by 2028 with a P/E of 11.3x. Another Narrative might focus on the risk section around loan performance, competition and margins and therefore settle on a lower fair value than the US$458 analyst consensus.
Do you think there's more to the story for Credit Acceptance? Head over to our Community to see what others are saying!
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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