Hilltop Down to Neutral
by Zacks Equity ResearchJanuary 24, 2012 | Comments : 0 Recommended this article: (0)
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We have downgraded our recommendation on Hilltop Holdings Inc. ( HTH - Analyst Report ) to Neutral from Outperform based on weak global cues, amid which 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 resumption of share buybacks.
Hilltop broke even in the third quarter of 2011 against the loss of 13 cents in the year-ago quarter and the Zacks Consensus Estimate of a loss of 22 cents per share. Net income also rose to $0.25 million from a loss of $7.2 million in the prior-year quarter.
Results benefited from modest underwriting profitability, premiums growth, net realized gains and investment income that drove the top line. However, this growth was offset by higher-than-expected expenses, which in turn hampered the combined ratio and resulted in operating cash outflow.
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. Additionally, Hilltop’s sole dependence on inorganic growth (from the NLASCO acquisition) amid intensely competitive insurance industry and volatile economy continues to be the cause of concern in the intermediate term.
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.
Moreover, Hilltop’s healthy capital deployment strategy is also reflected from the new $100 million share repurchase program announced in November 2011. While the repurchases will be initiated through open market operations, depending on the market conditions, the program is scheduled to expire on November 1, 2012. The share repurchase program also bodes well for imbibing confidence in the shareholders.
Overall, Hilltop’s future performance will largely depend on the prudent deployment of its reserves. We thus, expect the company to grow and evolve in the upcoming quarters by expanding its operations, which should further drive the desired upside in the stock. Nevertheless, a waiting period remains for the clearance of the smog and for gaining better visibility, which justifies our current Neutral outlook.
Weighing all the pros and cons, the Zacks Consensus Estimate of earnings for fourth-quarter 2011 are currently pegged at 2 cents, in line with the year-ago quarter. However, for 2011, loss is estimated to be 19 cents, down from a loss of 24 cents in 2010. Meanwhile, earnings are expected to grow to 7 cents in 2012, significantly up from the estimated loss in 2011.
Additionally, the quantitative Zacks Rank for Hilltop is currently #3, translating into a short-term Hold rating, while the long-term stance remains Neutral.
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