Execution Risks Linger over Hilltop Holdings - Analyst Blog

On Apr 2, we issued an updated research report on Hilltop Holdings Inc. HTH. Although the latest acquisitions have expanded the company's business profile, inherent risks related to execution, capital and liabilities continue to pull down significant growth expectations in the near term.

Moreover, this Zacks Rank #4 (Sell) stock delivered negative earnings surprises in 2 of the last 4 quarters with an average beat of -2.0%. The company's fourth-quarter earnings also missed the Zacks Consensus Estimate by 10.5% despite outpacing the year-ago quarter number by 161.5%.

Consistent economic volatility has drastically undermined Hilltop's earnings potential. Additionally, the advantages of the acquisitions of PlainsCapital and FNB also brought along significant liabilities that surged $7.6 billion at 2013-end from $6.1 billion at 2012-end, posing direct financial risks to the consolidated operating leverage of the company.

Going ahead, the achievement of projected cost savings related to the PlainsCapital acquisition is dependent on successful integration and absorption of substantial expenses. This poses a pertinent challenge given higher interest and non-interest expenses along with elevated loan loss provisions, all of which showcased an increasing trend in 2011, 2012 and 2013, thereby hampering margins and outlook.

Moreover, given the absence of comparable progress parameters in the year-ago periods, growth recorded in the last four quarters is yet to instil confidence as it tempered sequentially. It is likely that growth may moderate in the upcoming quarters as well. Owing to the sluggish recovery, higher operating expenses and catastrophe losses as well as management and market risks, a significant rebound remains elusive in the near future.

Nonetheless, Hilltop holds a comfortable risk-based capital position, all of which stood well above the regulatory requirements. Additionally, the acquisitions and business diversification has entailed improved earnings, cash flows and return on equity (ROE). This also leaves excess capital and ample scope for more meaningful acquisitions and alliances to achieve long-term growth at the company.

Overall, an adverse risk-reward balance in the near term has led to negative estimate revisions for 2014 and 2015. As a result, the Zacks Consensus Estimate for 2014 and 2015 are pegged at $1.46 and $1.63 per share, down 8.8% and 5.8%, respectively, in the last 30 days.

Key Picks in the Sector

While Hilltop remains under the radar currently, better-ranked stocks in the financial sector include AmTrust Financial Services Inc. AFSI, EMC Insurance Inc. EMCI and Global Indemnity Plc GBLI. All these stocks sport a Zacks Rank #1 (Strong Buy).