Hilltop Holdings Inc.
) 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
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.
Hallmark Financial Services Inc.
Endurance Specialty Holdings Ltd.
). All these stocks sport a Zacks Rank #1 (Strong Buy).
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