From the shrinking field of automotive financial services firms has emerged Onyx Acceptance Corp., which avoided the rush to subprime markets and has appeared the wiser for it. By sticking to near-prime and prime loans, the company has attracted the attention of Wall Street financiers willing to back a more conservative independent player.
Onyx reported net income of $9.8 million for the 1999 calendar year, up 61 percent from 1998, while total revenue increased 47 percent to $88.9 million.
Onyx currently splits its portfolio 15 percent on new-car loans, and 85 percent on used-car loans, mostly to franchised new-car dealers. The company recently added Chase Securities to Solomon Smith Barney and Merrill Lynch as providers of warehousing lines of credit.
Numbers like these helped the Foothill Ranch, Calif., firm secure a listing by Individual Investor as one of America's 100 fastest growing companies, and one of only four below a market cap of $75 million to receive a 'thumbs up' rating. Equity analyst Louis Feldman of Red Chip Review calls Onyx 'disciplined, picky and choosy.'
Leading Onyx is John Hall, one of the founders of the company that split from former employer WFS Financial in 1994. Last year, Hall was named entrepreneur of the year for Orange County financial service companies by Ernst & Young. Hall spoke with Staff Reporter Mark Rechtin about Onyx's future. Edited excerpts follow:
The company's performance isn't reflected in its stock price. How can you explain it being at 52-week and five-year lows?
It's not just us, but the entire financial services sector. Investors are infatuated with tech and biotech stocks and we're seeing multiples we haven't seen before there. But at some point earnings need to match the value of the stock. Investors are going to have to look at the quality of earnings and real growth. Brokers are asking what's wrong when we're trading at 60 percent of book. But we start showing them other financial services companies, and compare that to our story and earnings and reserves. Then they see that everything is in the right direction but the stock price. Six years ago, there were 22 public companies in this industry, and people were telling us we should be in subprime because there was more spread. But we projected there would be a fallout, and that's what happened, and now there are maybe four companies.
Your stock price had an interesting spike in volume and price range earlier this year. What happened?
Another company called Onyx Software put out a press release and that day traders got confused. Normally we do 30,000 shares a day and suddenly we get 1 million in a day and the price goes way up. But it went back down again when people realized what happened. But there's a funny thing in that a couple of people hung onto their stock because they saw that we were really undervalued.
How old are the used cars in your portfolio?
We're putting loans mostly on 1- to 3-year-old cars, but also have the tightest loan-to-value ratio in the sector. We don't go beyond 60 months. Extended terms just don't work because they're way past the amortization of the product. I don't see why we should have a seven-year loan on a used car, when most people keep the product for two years. Driving down the payment just isn't worth it.
Why not go into subprime now that the field has thinned?
Because we can't forecast a projection of losses in the 8-to-12 percent range. We think it's more in the 20-plus percent range. We already have a good size spread, but our loss factor is controllable. A 3.5 percent cumulative loss rate is easier to control than 8.5 percent.
Have you thought about getting into leasing?
A couple of years ago, we went through every vehicle line and couldn't get one car to work for us. We looked at the numbers and saw that everyone was playing with the residuals. Now all those cars are coming back, and everyone's in the hole and getting out of the market. Besides, you can't compete against the captive finance companies when they want market share.
Your delinquencies and charge-offs are up. Why?
Going into the fourth quarter we were in some new markets in the East Coast, and we weren't used to it. We had some pockets of borrowers experiencing natural disasters. If you have a hurricane, you don't worry about your car payment if your house is floating down the street.
You have 17 service centers in 13 states, and are doing business in 31 states. How far can you grow?
Our limit is based on onerous collection laws in some states, which are unfriendly to the lender as far as collecting deficiency balances. We haven't entered Texas for quite a while, because it was a haven for subprime in 1996-97 and we couldn't compete because it wasn't healthy. But today it is a healthy market, so we're excited to go there now. Our strategy is to go from the top-down in sales volume, state by state. We're opening a center or two every quarter.
Why did you decide to split from WFS?
I've always been a startup guy. I had my own software company before going there. At the bank, I had been in the auto division, which was the profit center. I had a lot of ideas as far as wanting to grow, how people should be paid. By taking that outside we could achieve those things.
So your pay plan is different?
Most finance companies have an account manager and a credit officer, but they aren't teamed up. Usually, the account manager can make a ton of money from commission while the credit officer is on a fixed salary. We like the idea that both should be paid identically and tied to the volume yield and credit quality. Now both are in sync with looking for the kind of credit quality we want and the services we offer. For our production people, 40 percent of their compensation is tied to the quality of that product, and no one else does that. It also helps that 25 percent of the company is owned by the employees.
What about using the Internet?
We've looked at going direct, but it isn't worth it. The dealer does a lot of work, walks the customer through the process, writes all the paperwork, files the registration, makes sure the collateral is for real. If we went direct, then we'd have to do all that work, and so it wouldn't result in people getting a lower rate from us. Besides, with all these off-lease cars going back to dealers, the dealer network will never go away because no one will be able to push those used cars through inventory. So we can use the Internet to get closer to the dealer, not exclude him. If I'm just one selection among 50 clicks, that's not an attractive business model because there is no servicing or aiding the customer.