Skip to Content
Stock Strategist

A Case Study in Survival

How one specialty finance company lived to lend another day.

Mentioned: , , , ,

While many specialty finance companies went out of business or suffered permanent impairment during the credit crunch beginning in mid-2007, subprime auto lender  AmeriCredit's (ACF) stock price recently rebounded more than 600% from its early 2009 lows to nearly pre-crisis levels. In light of this outstanding performance, and with the benefit of hindsight, we set out to determine which factors were responsible for the company's (and its shareholders') success. In our opinion, the company is now fairly priced, but we feel there are valuable lessons to be learned from the recent experience of its investors.

Though tarred by association with subprime mortgage lending, loans made by AmeriCredit differed in several important ways. First, AmeriCredit's loans were priced far more appropriately. Subprime mortgages were often offered with extremely low "teaser rates," allowing borrowers to temporarily afford homes far beyond their price range. AmeriCredit's auto loans, on the other hand, carried midteens APRs, compensating higher default rates among high-risk borrowers. Despite high credit losses and liquidity troubles, the company lost money only in fiscal 2008. Furthermore, the collateral behind AmeriCredit's loans (used automobiles) held its value far better than residential housing did. The company's recovery rates on repossessed automobiles typically fluctuate with the Manheim Used Vehicle Index, which was remarkably stable over the past 15 years, at least in comparison to the Case-Shiller index of home prices. Without a boom in used car prices preceding it, the bust was much less painful. As a result, losses in the current cycle occurred for the same reasons they always have--mainly job losses as the general rate of unemployment rose. Loss rates in auto loans were therefore far more predictable than in subprime mortgages. Thus, AmeriCredit was less subject to an unpredictable macroeconomic downturn than it might have appeared. The same might be said for other lenders, like  American Express (AXP) and  Capital One (COF), whose extremely high profit margins cushioned them against similar increases in credit losses.

Jim Sinegal does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

We’d like to share more about how we work and what drives our day-to-day business.

We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:

  • Verify your identity, personalize the content you receive, or create and administer your account.
  • Provide specific products and services to you, such as portfolio management or data aggregation.
  • Develop and improve features of our offerings.
  • Gear advertisements and other marketing efforts towards your interests.

To learn more about how we handle and protect your data, visit our privacy center.

Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.

To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.

Read our editorial policy to learn more about our process.