YCG Investments
“If you buy above average businesses at below average prices, on average, we believe you should come out ahead.” — Brian Yacktman

Revisiting the Case for Used Autos

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In a previous blog, we discussed the case for used cars and our small investment in CarMax (KMX). We have additional exposure to the used car market through a much larger investment in AmeriCredit (ACF).

AmeriCredit is a sub-prime auto loan business (primarily used cars) based in Fort Worth, TX. In today’s market, the term “sub-prime” doesn’t draw many fans, but in large part, this is what helped create the opportunity. Missing home payments versus missing auto payments are a bit different – you can’t drive your house to work. To survive in today’s society, cars have virtually become a necessity. We are not saying ACF will thrive in a recession…sure, business will dry up as there are less people “trading” cars and as demand for autos declines altogether. But they do garner the largest portion of this market, and it is a needed market.

AmeriCredit is essentially a credit card company with autos as collateral. They’re more safely levered at 6 or 7 to 1, as opposed to many financials which are 15 or 20 to 1. Another difference to sub-prime mortgages: with housing, you’re talking about an amortization table of 30 years, versus a 5 year amortization table with a car. With a much shorter table, as long as the loan is a couple years in, you’ll come out ok even if the car needs to be repossessed. This is why our major concern here is if unemployment were to skyrocket in a short period of time rather than steadily rise. This would create too many bad loans among those being issued right now, whereas, if unemployment moves up steadily, then they can ratchet the portfolio accordingly by tightening lending and raising rates.

The other potential problem is their ability to get credit – they clearly need access to the credit markets to make money. However, they recently were able to renegotiate their warehouse line of credit. We also take heart in knowing that if for some reason even this is not enough to get them through this downturn, Bruce Berkowitz of the Fairholme Fund has essentially stated they would backstop them. With 24% ownership, they have quite the incentive to do so. In fact, indirectly they own even more via their investment in Leucadia which also owns about 25% of AmeriCredit.

Most importantly – they’re cheap (although they’ve appreciated substantially as of recent). Inside management clearly recognizes this, as they have been purchasing millions of shares. Their tangible book value is approximately $15/share – and note, they are very conservative in their accounting. At one point, they traded hands at $2.85, or 19% of book value! Management has stated that maintaining their current book is no problem, thus even in liquidation, they would simply roll off the remaining book. However, if the business remains, the upside is far greater.

Disclaimer: The specific securities identified and discussed should not be considered a recommendation to purchase or sell any particular security. Rather, this commentary is presented solely for the purpose of illustrating YCG’s investment approach. These commentaries contain our views and opinions at the time such commentaries were written and are subject to change thereafter. The securities discussed do not represent an account’s entire portfolio and in the aggregate may represent only a small percentage of an account’s portfolio holdings. These commentaries may include “forward looking statements” which may or may not be accurate in the long-term. It should not be assumed that any of the securities transactions or holdings discussed were or will prove to be profitable. Past performance is no guarantee of future results.

Posted by: Brian Yacktman | June 01, 2009 | Permalink

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