Hilltop's Growth May Stagnate Near Term, Capital Stable

Zacks

Hilltop Holdings Inc. (HTH) has diversified its business profile through some meaningful acquisitions in the past couple of years. While these acquisitions have amplified the total size of the business, these have also increased liabilities and brought with it execution risks.

Moreover, this Zacks Rank #3 (Hold) stock delivered negative earnings surprises in 3 of the last 4 quarters with an average miss of 6.6%. The company’s first-quarter earnings also lagged the Zacks Consensus Estimate by 7.1% and the year-ago figure by 33.3%.

Following the anniversary of the PlainsCapital acquisition at 2013-end, the growth parameters in the past couple of quarters showcase moderated financial results from the comparable periods. This is attributable to persistent volatility in interest rates and fixed income markets that are weakening financial advisory fees, mortgage originations and fixed income sales. We expect tempered growth in the upcoming quarters as well.

Additionally, the PlainsCapital and FNB acquisitions increased the company’s liabilities that surged to $7.7 billion at Mar 2014-end from $7.6 billion at 2013-end and $6.1 billion at 2012-end. This has aggravated the company’s consolidated operating leverage. Going ahead, the pending acquisition of SWS Group may further weigh on margins.

As a result of the sluggish economic recovery, intense competition, limited area of operations, lower yields from loan portfolio, higher operating expenses and catastrophe losses as well as management and market risks, a significant rebound remains elusive for Hilltop in the near future.

Scope of Growth

Nonetheless, Hilltop’s capital ratios and liquidity remain sturdy, whereas an inflated asset base and investment portfolio are reflected in its improved book value and return on equity. Barring integration and market risks, the acquisitions are capable of appreciating the enterprise value. Going ahead, the completion of the SWS Group acquisition by the end of this year will further shore up the company’s banking operations.

Moreover, Hilltop’s disciplined underwriting philosophy, rate hikes and a better competitive position will continue to enhance premiums and contribute to the overall growth in the insurance business.

Overall, a balanced risk-reward proposition in the near term has led to estimates hitting a plateau for 2014 and 2015. As a result, the Zacks Consensus Estimate for 2014 and 2015 remained stagnant at $1.26 and $1.69 per share, respectively, in the last 60 days.

On year-over-year basis, earnings are expected to decline 9.8% in 2014 although it is likely to surge 33.4% in 2015.

Key Picks in the Sector

While we are currently cautious on Hilltop, better-ranked stocks in the financial sector include AmTrust Financial Services Inc. (AFSI), Hallmark Financial Services Inc. (HALL) and Endurance Specialty Holdings Ltd. (ENH). All these stocks sport a Zacks Rank #1 (Strong Buy).

Read the Full Research Report on HTH
Read the Full Research Report on HALL
Read the Full Research Report on AFSI
Read the Full Research Report on ENH


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