Rob Vinall on the Performance of Credit Acceptance and Salesforce
Rob Vinall is the founder and managing director of RV Capital, which he started in 2006. For the Business Owner Fund, he looks to invest in companies that are building their long-term competitive advantage, have honest and competent managers that set the right example and trade at an attractive price. Since 2008, the fund has capitalized at a 14% annual rate, though it was penalized this year with a drop of 40.2%.
Vinall runs a very concentrated fund that is heavily invested in technology companies, where the five biggest positions account for 73% of assets.
In his most recent letter to co-investors, he presented an update on his biggest holdings, namely Credit Acceptance Corp. (NASDAQ:CACC) and Salesforce Inc. (NYSE:CRM).
Credit Acceptance
The funds largest position is Credit Acceptance, a Southfield, Michigan-based auto finance company. Vinall explained the reasons for investing in Credit Acceptance in his 2014 letter. The business has had a terrific earnings performance since them, but he also commented on managements willingness to repurchase shares:
"At the time we invested, the company had 20.6 million shares outstanding. As of 25 July this year, that number stands at 12.9 million. This means that not only has the company greatly increased its earnings power, but our share of those earnings has increased by 60% over the holding period."
The recent performance of the stock as not been great, but Vinall remains confident in the company:
"A recession would be a short-term negative for loan performance as employment levels closely correlate with collections. However, historically Credit Acceptance has made the greatest strides in earnings performance when other lenders are forced to scale back lending. Credit Acceptance is the company with the strongest balance sheet and the highest margins. As a result, should other lenders be forced to scale back lending in a more hostile economic environment, it should be able to lean in. The headlines may be ugly, but if history is anything to go by, Credit Acceptance will do fine. Moreover, you can be sure the company will use any share price declines to lower the share count further."
SalesForce
Salesforce is a more recent investment for the fund, which Vinall wrote about in the first-half 2021 letter. However, the investment has not panned out as he expected:
"Given the utility-like nature of its business, it is the kind of investment I thought would do well in a market panic, but alas it was not to be."
Although Vinall still sees the company getting stronger (growing number of multi-cloud deals, growth higher than 18% per annum and revenue growth accelerating for Slack) with margins continuing to improve, he is now not comfortable with one aspect of his thesis, which is his estimate for the long-run operating margin of 40%. He wrote:
"My thinking was that when growth at some point inevitably tapered off, so too would growth costs, and the margin would drift higher. I do not expect growth to decelerate in the short term unless there is a deep recession, but were it to happen, my best guess today is that initially, costs would continue to go up. In other words, a slowdown in growth would more likely lead to a falling rather than a rising margin."
This article first appeared on GuruFocus.
