You pay a hefty premium for a cheery consensus. And you get a hefty discount for a gloomy one. We’re a long way from a depression-era stock market, or even a recession-era market (like 1973, 1983), but in one industry we’re tapping along at the bottom and that’s where you want to be looking for a great business that is on sale.
It's a pretty simple business. They lend you the money to buy your car, particularly if GMAC isn’t interested because your credit kind of sucks. You put a pile down and Americredit puts up the rest. They do about 400,000 a month. You pay, everything is good. You don’t pay, they come get your car and resell it. Simple business.Moat
Toll Bridge. If you're a dealer who wants to sell the car and GMAC won’t do the deal, you gotta take your client to a sub-prime lender and you have about three choices.
ACF is the big dog in the industry, with revenues over double the nearest competitor and about 4 times the earnings. And they do their own dirty work -- picking up the car and reselling it, which means they know more about the whole picture than anyone else.
ROIC is mid-teens, overall growth is bumpy, but the all important equity growth is pretty smooth on a bvps basis at about 8% per year. Lotsa green numbers here all the way back ten years.Management
Daniel Berce is the CEO and has been with ACF for a long time. He’s got a BAG (Big Audacious Goal) -- to move the biz from subprime to a fully diversified lender and build it huge.
His annual report could have used a better crystal ball, but he wasn’t gushing about the future too badly. Overall, he seems, on first glance, as if he’s pretty solid. We should dig in here before committing, though.Margin of Safety (MOS)
I used a growth rate of 11%. It's a bit above the long term equity growth rate and below the EPS growth rate and also the analyst estimated average.
The Rule PE would be 22, but that’s a bit on the historical high side. I’m more comfortable with 16 (this biz has a huge swing in PE rates, so although the medium average is 13, its highs go into the mid 20s. So I’m using a best guess).
I’ve got a current TTM EPS of $1.79. Current Value: $20. Selling for $10. Nice big MOS.
And the value to price thing gets better when we look at the equity of the business. That’s what this thing is worth if it folds up and sells off today. It's worth about $2 billion.
It has 119 million shares out there. That means that if this business folds and is sold off, it would bring in $16.80 per share. Hmmmm. It's selling for $10. If I owned it and just liquidated I’d get $16. Gee. Unless this thing is going bust, this is pretty sweet. I haven’t seen these values since 2003 at the darkest bottom of the market.Yield
Oh and remember how I used to write about Yield when I did the YUMMMY thing?
Random House hated YUMMMY, and so it became MMMM -- which is now the 4Ms. But the last Y in YUMMMY was cool. It's about the yield on our investment if we owned the whole business.
Since we own it all, we just take the earnings every year as our Yield and divide by the price we paid for the company.
Since we are buying it for $10 and the earnings are $1.79, our yield is almost 18%. Try and get that from a T-Bill. If earnings grow as we hope, in ten years our $10 will be getting earnings of $5 - 50% a year.
This is truly one of the great secrets of massively successful investing: buy a high yield and watch it continue to grow to a point where you are getting your entire investment back in earnings every year.
Of course we don’t get the cash (like Buffett does on many investments), but that’s okay because these guys reinvest it for us with a very high return on it (15% a year), or they buy back stock when it is cheap, which is even better.
Oh, and it has three greens (using a 10 MA) a couple of days ago. It could go down. It has its quarterly earnings coming up. If bad it could drop some more.
Remember that you don’t get to buy this unless you are willing to do the homework yourself. I’m not saying it's good. I’m saying its an interesting first example of what we will be seeing a lot more of in the future if the consumer market dries up. You tell me if it's good.
Now go play.