A Case Study in Survival
How one specialty finance company lived to lend another day.
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.
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