"...earnings will grow at an average annual rate of 23.9%..."
Ref: telecommanalyst.com
Cable Boxes for the Internet Age
By Marc H. Gerstein, Market Guide, Director of Investment Products
Does anyone remember the "information superhighway?" Once upon a time, the investment community bid shares of cable TV
companies to great heights based on the conviction that these outfits would collectively create and own the information superhighway
encompassing data, voice and interactivity.
A funny thing happened on the way to the future. The average person got hooked on the Internet and before you could say http://www,
the information superhighway was up and running and cable TV wasn't in the driver's seat. Actually, this really isn't much of a
superhighway; it's more like a pothole-plagued side street, and 56K modems mean cable's dream of superhighway dominance is still
alive.
But there are still more obstacles for cable firms. DSL (digital subscriber lines) emerged as a way to boost speed over old phone
lines, enabling broadband Internet to get off the ground. So cable operators are going to have to fight hard to win any meaningful slice
of the pie. And they can't forego the battle and just stay with television, because they need interactive data and voice capabilities to
differentiate themselves from satellite broadcasters.
It's nice to sell to customers who feel pressured to buy. SCIENTIFIC-ATLANTA (SFA), which is a leader in products used to transmit
digital signals and a major player in the market for set-top boxes used by cable TV subscribers to receive all these fancy new
services, does just that – it sells to customers who need to buy.
Admittedly, SCIENTIFIC-ATLANTA isn't the only company selling set-top boxes. The market is booming so strongly, the company
finds itself having to roll up its sleeves to boost production to keep pace with demand. It's little wonder, then, that
SCIENTIFIC-ATLANTA appeared on a screen whose EPS, operating margin and return on investment have been trending upward over
the past five years.
The company has been announcing a stream of big new contracts, most likely for sales to CHARTER COMMUNICATIONS (CHTR)
and ADELPHIA COMMUNICATIONS (ADLAC). Production is being ramped up from a rate of almost 780,000 set-top boxes a quarter
to about 1 million in July 2000 and 1.3 million by January 2001.
The consensus forecast calls for earnings of $0.83 a share in the fiscal year ending June 2000 and then a jump to $1.12 a share fiscal
2001. Analysts are forecasting that earnings will grow at an average annual rate of 23.9% thereafter. The bad news is those investors
have to pay a high price to participate in reasonably well-defined growth. The stock sells for about 60 times June 2001 EPS. But high
PEG ratios (P/E ratio divided by earnings growth rate) are a fact of life throughout the new economy. Those inclined to accept such
valuation risks can, with SCIENTIFIC-ATLANTA, at least hang their hats on the fact the company is profitable.
Another potential support for new economy stock valuations lies in the possibility for new business opportunities to produce more
growth than analysts now include in quantitative projections. For SCIENTIFIC-ATLANTA, newly announced ventures with NET2PHONE
(NTOP), for voice-over-Internet telephony, and EASTMAN KODAK (EK), for an interactive service to enable the sharing digital
photographs via TV, add the flavor of new business potential. |
