Hilltop's (HTH) Liquidity, Fundamentals Poised to Drive Growth - Analyst Blog

On Nov 12, we updated our research report on Hilltop Holdings Inc. (HTH). Despite a series of acquisitions in the recent past, the company's fundamentals have remained stable. Healthy balance sheet, free cash flow, capital ratios and investment portfolio also appear impressive and support book value. However, there are execution risks from the recent acquisitions.

This Zacks Rank #3 (Hold) stock delivered negative earnings surprises in 3 of the last 4 quarters with an average miss of 7.5%. The company's third-quarter earnings also lagged both the Zacks Consensus Estimate by 23.5% and the year-ago figure by 39.5%.

Rationale

Most of the downside stemmed from lower mortgage loan origination fees in the reported quarter along with increased purchase gains from the FNB acquisition recorded in the year-ago quarter. Even expenses related to the FNB acquisition were higher in the reported quarter. Nevertheless, net interest income, advisory fees and commissions as well as insurance premiums boosted top-line growth, while interest expense, combined ratio and claims witnessed improvement.  

Despite the challenging operating environment, Hilltop's balance sheet remained risk-free and adequately liquid, with total cash and investments of about $1.97 billion against total debt and short-term borrowings of about $962 million at Sep 2014-end.

Additionally, the company had free cash of $153 million at Sep 2014-end, while capital ratios remained strong. However, the pending acquisition of SWS Group could weigh on cash flows going forward.

Furthermore, while the recent takeovers of PlainsCapital and FNB will continue to appreciate Hilltop's enterprise value, the complete acquisition of SWS Group by 2014-end will further strengthen the company's banking operations. We believe that prudent capital management should mitigate market risks to strengthen the company's operating and competitive efficiencies against peers like Synovus Financial Corp. (SNV), First Horizon National Corp. (FHN) and Hancock Holding Co. (HBC).

Estimate Revision

Overall, a balanced risk-reward proposition in the near term has led to estimates hitting a plateau for 2014, whereby the Zacks Consensus Estimate remained stagnant at $1.30, following the earnings release. However, the same for 2015 dipped a penny to $1.69 per share in the same period. On a year-over-year basis, earnings are expected to decline 6.9% in 2014 though it is likely to surge 29.9% in 2015.

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