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Credit Acceptance: A Peter Lynch-Style Favorite

06/12/2019 5:00 am EST

Focus: FINANCIALS

John Reese

Founder and CEO, Validea.com And Validea Capital Management

For the model portfolio at Validea, editor John Reese selects stocks based on the long-term strategies of many of the stock market's most legendary investors. His latest addition earns a 100% rating based on the price-to-earnings growth strategy of famed fund manager Peter Lynch.

Credit Acceptance (CACC) offers financing programs that enable automobile dealers to sell vehicles to consumers. Its financing programs are offered through a network of auto dealers; its target market includes some 60,000 independent and franchised automobile dealers in the United States.

DETERMINE THE CLASSIFICATION:

This methodology would consider CACC a "fast-grower".

P/E/GROWTH RATIO: PASS

The investor should examine the P/E (14.53) relative to the growth rate (24.99%), based on the average of the 3, 4 and 5 year historical eps growth rates, for a company. This is a quick way of determining the fairness of the price. In this particular case, the P/E/G ratio for CACC (0.58) makes it favorable.

SALES AND P/E RATIO: PASS

For companies with sales greater than $1 billion, this methodology likes to see that the P/E ratio remain below 40. Large companies can have a difficult time maintaining a growth high enough to support a P/E above this threshold. CACC, whose sales are $1,344.0 million, needs to have a P/E below 40 to pass this criterion. CACC's P/E of (14.53) is considered acceptable.

EPS GROWTH RATE: PASS

This methodology favors companies that have several years of fast earnings growth, as these companies have a proven formula for growth that in many cases can continue many more years.

This methodology likes to see earnings growth in the range of 20% to 50%, as earnings growth over 50% may be unsustainable. The EPS growth rate for CACC is 25.0%, based on the average of the 3, 4 and 5 year historical eps growth rates, which is considered very good.

TOTAL DEBT/EQUITY RATIO: NEUTRAL

CACC is a financial company so debt to equity rules are not applied to determine the company's financial soundness.

EQUITY/ASSETS RATIO: PASS

This methodology uses the Equity/Assets Ratio as a way to determine a financial intermediary's health, as it is a better measure than the Debt/Equity Ratio. CACC's Equity/Assets ratio (30.00%) is extremely healthy and above the minimum 5% this methodology looks for, thus passing the criterion.

RETURN ON ASSETS: PASS

This methodology uses Return on Assets as a way to measure a financial intermediary's profitability. CACC's ROA (10.07%) is above the minimum 1% that this methodology looks for, thus passing the criterion.

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