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Strategies & Market Trends : Value Investing
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To: Paul Senior who wrote (53742)4/13/2014 12:00:53 PM
From: Spekulatius  Read Replies (1) of 78748
 
Re CRMT - the repossession rate is important. My calculation yields that they only get about 61% if the car face value back from thr average repossession, which is breakeven at best.. This is based on the Gannon and Hoang's numbers and some culled from the IR presentation.

The proceeds from repossession are the sum of downpayment ( ~6% - this number has shrunk due to competition), the receivables received before default (1.19x17/62*100%) and the residual value of the car ~32% of remaining loan value or 22.8% of face value).

The key lesson from those numbers is that defaulting loans lose money or at best break even and the earn only from those loans that are paid back, so when the rate of default increases, earnings will tank (just with any bank or ALLY probably). However with a 40% default rate to begin with it is clear that even a moderate change in default rate will hit the earnings disproportionally, unlike with a bank where default rate are typically <1%. So I do think that this is a very economy dependent business. What is interesting is that CRMT default rate spiked in 2007, while default rates in 2007 and 2008 where fairly normal. I think this has to do with housing where home equity was an alternative means if financing in 2006 and fell away in 2007, so the damage was already done in 2008/2009.

i'll put this stock in my watchlist, but I don't think I will buy this now. Higher interest rates are a threat to this business too, since I think the customer's probably won't be able to afford higher biweekly payments. This may be the reason the stock is down recently.
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