Thread by @greenycapital, I’m going to preface this with the following:This is the most coherent [...]

I’m going to preface this with the following:

This is the most coherent bull thesis on $CACC I have seen. Ever.

For that reason alone, I feel compelled to give my take, point by point, on where I agree and disagree with what the author is saying. A thread: https://twitter.com/autumncapital/status/1310239129272229890">https://twitter.com/autumncap...

https://twitter.com/autumncapital/status/1310239129272229890

1) “consistent ability to accurate forecast loan performance. Since 2003, the worst spread between actual and projected collections was -2.6%.” In absolutes, the numbers are factually accurate. But, those misses make up 5-10% of the “spread” between advances and collections...

And a much higher percentage of net operating profit before interest and taxes. That’s critical, given that $CACC is almost exclusively using debt to finance these loans. If that were a one off, no problem. But, realized collections have come in below initial forecasts each of...

The last 7 years, and we are only just at the beginning of a financial crisis.

Aside from the numbers, there is a significant assumption here: that loan performance is dependent on CACCs underwriting discipline. It’s not. It’s based on their aggressive collection practices...

Which regulators in 40 states are now realizing is a real problem. More on this later.

2) “when competition increases the company does not aggressively expand by undercutting price and taking on increased risk. It does not unsustainably increase is leverage either.” Here,...

The numbers do not agree. $CACC management has gone on record as saying the last 5 years have been the most competitive in the company’s history. During that time, spreads have compressed by 30%+, terms and volumes have expanded, and purchase program loans as a % of total...

Have grown from 9.3% of volume in 2014 to over 35% now. This isn’t a company that has moderated risk when competition has expanded, its expanded risk. Using 2008 as an example also fails to recognize how much bigger the purchase program is now (40% vs <10% of dollar volumes).

This is a different company than it was in ‘05-‘07. They are 10x larger, and carrying much more risk and leverage.

3) “$CACC sacrifices growth to maintain a significant spread in every loan it accepts. It is also has the least leverage. It is therefore the most insulate player.” Oof, we definitely don’t agree on this. A couple facts:

-Of $ALLY, $SC and $CACC, CACC is the only one that boasts about making loans to anyone. Their customers have the lowest average FICO scores, and the highest default rates. CACC does excel at collecting from those customers, which allows them higher spreads before collection fees

-CACC is the only one of the group that uses “level-yield” accounting, which pulls forward earnings and keeps accounts receivable elevated. Adjusting for this, balance sheet leverage is in-line with $ALLY, but still lower than $SC.

Ultimately, CACC is at the bottom of the...

Totem poll, and would be very much at risk if the bottom falls out of the subprime market. They are the weakest and smallest player.

4) “as a positive kicker, ken booth has purchased $1.5 mil worth of shares over the last year.” This is true. In the meantime, CEO Roberts and...

Former chairman Don Foss have sold $21 mil and $90 mil+ respectively in the last 12 months. Not sure I’d be touting the booth purchases that occurred in March right before the country shut down.

5) “management’s non-GAAP Financial’s accurate reflect the reality of the business.” No, they don’t. I’ve spent hours and many many threads detailing the realities of the games $CACC plays with its accounting, but I’ll leave it at this: effective yield accounting pulls forward...

Substantially all of CACCs earnings on a loan before the principal itself is “repaid” on their books. This does not reflect the reality of their loan repayment schedules (which are repaid in stable payment installments), and it does not reflect the reality of the remaining risk..

Underlying those loans. The change to CECL goes part of the way in rectifying this problem, but in no way does CACCs non-GAAP accounting reflect the actual cash earnings of the business. Their earnings methodology overstates loans receivable balances and earnings, and as...

Their loan book grows, that distortion gets larger (the opposite is true when it shrinks, like it is now). If you want to value this business on earnings, like this piece does, you have to adjust for the pull forward, which would lower earnings by 50% and imply a stock price of..

<$200/share.

6) “the market is overpricing the impsct of legal and regulatory risk on $CACC.” No it isn’t, but I would prefer to leave this to the experts like @PlainSite. Bottom line, the AG lawsuits represent an existential risk to CACCs ability to lend and collect in those..

States. This isn’t about damages (though CACC doesn’t have the money to pay a substantial fine of any kind without impairing it’s financial liquidity tremendously), it’s about the fact that the company makes substantially all of its money by charging interest rates that are...

Effectively higher than the legal rates in those states. These lawsuits threaten their ability to do that, and that’s a serious problem for the company moving forward.

That ends this thread. Again, thanks to @AutumnCapital for putting this together. It truly is the most coherent and comprehensive write-up I’ve seen on the story, and I would love to have a substantive debate on the topic if you have the time/desire.

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