Monthly Archives: August 2016

Why The Financial Services Sector Is Spending Heavily

The financial sector has been the leading contributor among 13 sectors in the previous six presidential elections dating to 1992. The sector tends to favor Republican candidates.

This reflects financial services organizations’ increasing interest in election outcomes and the rippling of the Supreme Court’s controversial 2010 Citizens United decision that sanctioned unlimited political contributions by outside political groups. Regulation of the financial services sector has been a major campaign issue. Republicans tend to favor keeping the status quo or decreasing regulation, including the party’s presidential nominee Donald Trump.

As a result, Republicans have received the lion’s share of the sector’s largesse.

This year, 62% of contributions (excluding outside/soft money) from the financial sector have gone to Republicans compared to just 37.9% to Democrats.  ExceptVenture Capital, every industry in the financial sector including commercial banks, securities/investment, hedge funds and real estate, have contributed more to Republicans than Democrats.

The financial services sector has so far contributed close to $637 million this year, according to the Center for Responsive Politics.

The Citizens United ruling prohibits government from restricting contributions by non-profit groups and by extension for unions and for-profit organizations.

Consider the three observations about political spending below:

1. Financial Sector Contributes to Outside Groups

Since 2010, the bulk of total contributions by the financial sector has been going to outside spending groups. The largest total has been in the 2016 election cycle.

Outside money groups like Super PACs can accept unlimited contributions and are allowed to advocate for or against a candidate, a direct result of the 2010 Citizens United ruling. This year, the contribution by the sector is $309.41 million compared to just $17.9 million in 2010.

Renaissance Technologies gave $30.24 million to outside spending groups. Super-PACs like Priorities USA Action and Keep the Promise II received $9 million and $13.5 million, respectively from the investment management company.

The next biggest contributor in the sector, Elliott Management, gave 98% to Republicans with a sum of $15.25 million to outside spending groups.

100% contributions to Republicans, the contributions to outside spending groups have been around $15.25 million and $15.08 million correspondingly, for Wilks Brother and Starr Companies.

2. Financial Sector Spends Heavily on Lobbying

From 2010 to 2016, the financial sector spent close to $3.17 billion on lobbying. The industries in the financial sector tend to agree on issues like opposing taxes and excessive regulation of financial instruments.

The sector spends more on lobbying than all but two of the other 13 major sectors. Within the sector, the insurance industry spends most heavily on lobbying. Insurance ranked only behind pharmaceuticals and health products among 80 industries in spending on lobbying, according to the Center for Responsive Politics.

Insurance spends more on lobbying than in campaign contributions. The insurance industry contributed about $60 million in political contributions this year (65% to Republicans) and more than $75 million on lobbying.

3. Commercial Banks Quadruple Spending to Outside Groups

Commercial banks have contributed $28.84 million this year to federal candidates, committees, parties and outside money groups that support them.

According to the Center for Responsive Politics, of that amount, the groups spent $4.59 million on outside groups, about four times the amount in 2014.

Commercial Banks ranked among the top five lobbying industries in the financial sector in 2016 with lobbying expenditure of around $31 million. In other words, this industry spends more on lobbying than on campaign contributions.

Toll Brothers Stock

Shares of Toll Bothers (TOL) are down almost 30% in the last year. The company reports fiscal third-quarter earnings for 2016 on Tuesday. I’m cautious on the stock.

Toll reported mixed second-quarter results at the end of May. Earnings of 51 cents per share were ahead of the consensus of 46 cents. Average selling prices of $856,000 were in line. However operating margins of 10.5% were well below Street estimates. Margins were negatively impacted by $6.4 million of write-downs. Total orders were 1,993 homes, which represented just 3% growth, far below the consensus estimate of 8%. In addition, management said the first three weeks of the third quarter were flat.

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Toll Brothers is expected to report third-quarter earnings of 61 cents per share on revenue of $1.25 billion. The company previously forecast a backlog conversion rate of 30% and an average delivery price of $825,000.

For fiscal 2016, the Street is looking for 5,800 to 6,300 home deliveries this year, with an average delivery price in the range of $820,000 to $850,000. The company gave guidance for homebuilding revenue of $4.76 billion to $5.36 billion, and about $117 million in joint-venture revenue. GAAP earnings for the year are at $2.60. Next year, revenue looks like it will be $5.733 billion, up 17%, with earnings of $3.15 per share.

Toll Brothers faces sluggish order growth. This was the third quarter in a row that order growth was below estimates, and it only reinforces the belief that the housing market is still lackluster. Toll Brothers ended fiscal 2015 with total order growth of just 2%. For the past few quarters, analysts have been forecasting order growth in the high single digits (7% to 9%).

Last quarter, Northeast orders were down 14%, and orders for the company’s City Living project were down 14% as well. Given the lack of traction in closing volumes, it’s hard to see any upside in the shares.

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At $28 per share and 11 times fiscal 2016 estimates and only 9 times next year, the stock may seem cheap, but investors are discounting a housing slowdown and are unwilling to grant the shares a higher multiple until order growth picks up.

New homes in the $200,000 price range are selling as fast as builders can put them up, but at Toll’s higher prices, it’s difficult to sell such an expensive product. Some analysts think the shares can get to the $33 to $36 range, but unless order growth picks up dramatically, I don’t think the stock will see much lift.