Lee, found this on another board. Don't know the original source,or if you've already seen it:
Here is Dessauer's take on SFA.
Last night, I listened to the conference call from Scientific Atlanta (NYSE, SFA, $22.80). This morning, I looked at all the Wall Street analysts’ written comments on the earnings and the outlook for the company. Then, I listened to a replay of the conference call, just to be sure. My conclusion is that we have a rare and magnificent opportunity to profit by buying more Scientific Atlanta. In this case, there has been a disconnect between Wall Street and the real world. First of all, Scientific Atlanta generated $25 million in excess cash in the fourth fiscal quarter, bringing total cash to roughly $4.50 a share. In the new year that began July first, management says that earnings will be down, but down less than 10%. In the year that ended June 30, after eliminating one-time effects, the company earned $1.74 a share. I think a fair estimate for this year is $1.60.
Take a price of $23 and subtract the $4.50 in cash and then divide by the slump year earnings and the stock is selling at 11.5 times earnings. That is a ridiculously low valuation. Here is why: First of all, Wall Street is not looking at the cable industry realistically. The cable operators are Scientific Atlanta’s customers. The earnings depend on how much those cable companies spend on their systems, but the cable industry has been changing rapidly and dramatically the past few years. Jim McDonald, CEO of Scientific Atlanta, said the cable industry is in the best shape ever.
Years ago, cable operators were a collection of small rag-tag operators making money locally and under local political supervision. There still are some small, local cable companies, but there also has been lots of consolidation in the industry which is now dominated by big companies like AT&T and Comcast. They are run like big public companies, not like the old local operators. The cable industry is still developing, consolidating and growing. Scientific Atlanta is the #1 company, serving the needs of this large, evolving industry.
Cable companies are under tremendous competitive pressure from satellite TV. News Corp is expected to arrive in the U.S. with a competitive form of video on demand. The cable companies cannot let News Corp get a foothold with their customers here. They must get out in front of that competition. They can do so by ramping up video on demand. The cable technology is better. By ramping up now, the cable companies will get ahead of News Corp and satellite TV and also reduce their own internal churn rate. Consumers want video on demand. Wherever it has been rolled out or tested, the response has been positive and dramatic.
Jim McDonald and his team talk to their customers all the time. What they can say publicly, even on an earnings conference call, is limited. But when a CEO of the integrity of Jim McDonald says that he believes there will be a pick up in orders starting in the fall, when people come back from summer vacation, he knows what he is talking about. He also says that while phase one of the cable TV systems upgrade is coming to an end, phase two is just beginning. Phase two is highlighted by, but by no means limited to, video on demand. Phase two of the cable TV capital spending program is likely to be as exciting as phase one and likely to deliver as much profit growth for Scientific Atlanta.
This is a company that executes its business plans, as promised, all the time. In the face of slower sales, Scientific Atlanta cut costs and actually expanded its profit margins. Jim McDonald and his team have been out in front of the competition with new products and strategies for years. The company spends heavily on Research and Development and that keeps the pipeline full of leading edge new systems and products. My subscribers have made fortunes in this stock by buying whenever the stock market overreacts, as it has done today. We bought after the Asian currency crisis and after an earnings miss a couple of years ago. The results have been fantastic, even in light of today’s decline. We have profits even after today’s irrational meltdown. Fast forward six month to a year and we will be happy that we own all the Scientific Atlanta we can. |
