We have downgraded our recommendation on
Hilltop Holdings Inc.
) to Neutral from Outperform based on weak global cues, amid which
we believe expenses and cash outflow are expected to remain
elevated. However, a sound capital position along with a risk-free
balance sheet has also paved way for the proposed PlainsCapital
acquisition and resumption of share buybacks.
Hilltop's net income for first quarter 2012 reduced to $0.3
million or 1 cent per share from $1.4 million or 2 cents per share
in the year-ago period. Earnings also lagged the Zacks Consensus
Estimate of 4 cents per share.
Results reflected higher premiums and investment income along
with improved net realized gains that drove the top line. However,
this growth was substantially offset by higher-than-expected
expenses, which in turn hampered the combined ratio and resulted in
operating cash outflow and underwriting loss in the reported
Nevertheless, Hilltop's vast exposure to the weather-risk prone
areas increases the loss and loss adjustment expenses, which also
deteriorates its claim ratios, combined ratio and underwriting
expense ratios. These factors have not only deteriorated the
company's underwriting capabilities but also the cash position of
the company. A substantial decline in operating cash flow at the
end of 2011 followed by a continued decline in the first quarter of
2012 further raises caution on Hilltop's operating leverage.
The insurance industry is highly competitive and has
historically been characterized by periods of significant price
competition. The industry has been facing falling prices for almost
four years now, especially for the Property & Casualty segment,
due to the global market downturn that had peaked a couple of years
ago, and this is also affecting Hilltop substantially.
On the flip side though, Hilltop's balance sheet remained risk
free and fairly liquid despite the challenging operating
environment. Moreover, Hilltop's investment, debt and securities
along with its subsidiaries are well poised in the market owing to
their superior financial strength and credit ratings. This leaves
excess capital and ample scope for more meaningful acquisitions and
alliances for the company's long-term growth.
Complementing its inorganic growth and expansion strategy,
Hilltop intends to buy whole of PlainsCapital for about $537
million, as announced in May 2012. We believe the acquisition is
affordable and aligned to Hilltop's growth goals, thereby
fortifying the company's market position in the primary operating
markets of Texas, Oklahoma, Georgia, Tennessee and Arizona. The
deal is subject to customary approvals and is expected to be
culminated by the end of 2012. Moreover, Hilltop's healthy capital
deployment strategy is also reflected from the new $100 million
share repurchase program announced in November 2011, which bodes
well for imbibing confidence in the shareholders.
Overall, Hilltop's future performance will largely depend on the
prudent deployment of its reserves. Thus, we expect the company to
grow and evolve in the upcoming quarters by expanding its
operations, which should further drive the anticipated upside in
the stock. Nevertheless, we wait for the clearance of the smog and
for gaining better visibility, which justifies our current Neutral
Weighing all the pros and cons, the Zacks Consensus Estimate is
currently pegged at a loss of 11 cents per share for second-quarter
2012, lower than the loss of 23 cents per share in the year-ago
quarter. Meanwhile, Hilltop is expected to report break-even
figures per share in 2012, up from a loss of 12 cents per share in
2011. Hilltop primarily competes with
PennyMac Mortgage Investment Trust
) in its insurance space.
Additionally, the quantitative Zacks Rank for Hilltop is
currently #4, translating into a short-term Sell rating, while the
long-term stance remains Neutral.
HILLTOP HLDGS (HTH): Free Stock Analysis Report
PENNYMAC MORTGE (PMT): Free Stock Analysis
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