I remember a fund manager telling me in May not to ask too many questions about the 20-plus price-to-earnings multiple salary packaging facilitator McMillan Shakespeare (ASX code MMS) was then trading on after its shares had climbed almost 600 per cent in the previous five years. At the time he said: "You don't bet against God, the church and the state."
McMillan's client base is predominantly charities and governments because these groups have limited salary budgets, so consequently offer employees deals usually involving making vehicle lease payments out of pre-tax salaries.
Its share price halved last Thursday as questions belatedly emerged about how much of McMillan's profits came from these "novated" lease deals after Australia's Treasurer announced a radical change to the fringe-benefits tax on this arrangement.
In light of this, we would add this to the fund manager's statement: "What God, the church and the state giveth, they can also taketh away." And it got us thinking about other areas that have earnings that are heavily financially engineered.
Possibly the most vulnerable when it comes to the potential for government regulation to inhibit profits are the consumer-lending businesses run by the likes of FlexiGroup (FXL), Money3 (MNY) and ThinkSmart (TSM).
If the government cracks down on disclosure requirements or early termination rules, these companies' earnings should suffer, and their share prices doubly so. After all, these stocks have either doubled in the past 12 months, or are close to doing so.
For example, FlexiGroup's Certegy Ezi-Pay might enable you to buy a ring for $1000 by paying $200 upfront, and then $100 a month for eight months. On the face of it, there aren't any funding costs for the purchaser. In actual fact, the retailer is paying Certegy a margin and the purchaser has no idea of the actual interest rate being paid, because it's embedded in the price.
Another example is that for many such "easy payment" products, if the purchaser gets into financial hardship and isn't able to continue to make payments they are liable to pay the entire amount, regardless of how much has been paid, and whether the good purchased is returned or not.
Stocks with life-insurance income that deliver annuity income streams for investors also have earnings based on financial engineering. Companies like QBE and AMP are at risk if anything goes wrong on this side of their business because of their long-tailed liability policies, whose payouts can stretch for decades.
This was particularly evident in AMP's profit downgrade last month that revealed a lot more executives paying premiums for income-protection insurance had come down with stress-related illnesses than AMP's actuaries had budgeted for.
The earnings of investment management firm Challenger are underpinned by the lifetime annuities it offers its customers. This offer is based on the favourable tax treatment of accepting your superannuation in these terms, rather than in a lump sum.
The biggest area by market capitalisation whose profits are at risk if the government changes its mind is definitely the regulated utility. Government authorities act to limit returns because of their powerful market position.
The companies include Sydney Airport, gambling houses such as Echo Entertainment and Crown, and electricity and gas network owners such as APA and Envestra.
These stocks are often touted as "risk free", but we know from the recent share price action in McMillan, not to mention Echo, Sydney Airport, APA and Envestra, that this is far from the case.