SFA---Scientific-Atlanta: Armed for the Cable Revolution
by Blair G. Jeffery
High Tech Issues May 23 2000 4:00PM CST
If there is one company that will benefit from the increasing broadband revolution it has to be Scientific-Atlanta. The leading maker of set-top cable boxes in the United States, Scientific-Atlanta strives to make cable TV more than a broadcast programming medium, intending to transform this technology into a full-scale interactive experience.
Historical Perspective
Founded 1951
Initial Public Offering 1956
Employees 6,502
Ticker Symbol SFA
Exchange Traded NYSE
Patents Held 314
With Scientific-Atlanta's proprietary Explorer set-top box technology, a user can not only access better pay-per-view and cable products, but also have access to every Internet function and multimedia device available. Basically, SFA is building a product that will allow users to merge their cable, TV, and computer devices into one ultra-powerful technology.
Scientific-Atlanta was founded in 1951 by a few Georgia Tech professors. The company went public in 1956 with the majority of its products developed for military uses. In 1973, the company released its first satellite earth station for the cable TV marketplace. Scientific-Atlanta still provides satellite services to this day, but only through the company's ViaSat division. Today, the company's biggest product is the cable TV set-top box.
Product Breakdown
The creators of the set-top box had in mind a fully integrated network capable of sending and receiving email, accessing the Internet, providing true video-on-demand, and even facilitating e-commerce such as banking, shopping and stock trading.
SFA's Largest Customers
Time Warner
AT&T
ComCast
Cox Communications
Adelphia
Cable & Wireless
Media One
The key differentiating characteristic of the Explorer set-top box is a real-time, scalable reverse path solution.
The scalable reverse path solution allows the set-top to communicate with the cable system headend instantaneously (real-time) over a hybrid fiber-coax broadband network. All set-top boxes have a reverse path technology; none of the other devices on the market have real-time reverse path technology. SFA's Explorer device is the only real-time system with full support for instantaneous, two-way communications over a scalable reverse path. According to Scientific-Atlanta, this real-time reverse path technology is the reason that CableLabs selected Scientific-Atlanta as the system integrator for OpenCable - the industry's standard for end-to-end system integration specifications.
According to the company's white papers, Scientific-Atlanta is also the only company with experience in integrating a completely interactive, IP-based digital network, including network architecture, digital control systems, applications, and the physical and communications layers.
Although set-top boxes account for roughly 40 percent of Scientific-Atlanta's sales, the company provides several other products. SFA also provides amplifiers, antennas, combiners, converters, demodulators, modulators, network controllers, processors, RF electronics, receivers/descramblers, satellite earth stations and stereo generators.
Time Warner and Media One are the two largest customers to date, with Time Warner accounting for 16 percent of sales and Media One accounting for 11 percent of sales.
Fundamental Breakdown
Continuing an already impressive track record, Scientific-Atlanta recently reported record bookings, revenues and profits in the firm's third quarter. For the quarter ending March 31, 2000, bookings were $594.9 million, an increase of $290.8 million over the prior year's third quarter figures. Revenues exceeded $440.7 million in the third quarter, rising $120.7 million from the same period a year ago.
Quarter EPS Est. Surprise %
03/00 $0.230 $0.201 14.43%
12/99 $0.180 $0.162 10.77%
10/99 $0.155 $0.140 11.11%
07/99 $0.165 $0.140 18.28%
04/99 $0.130 $0.097 34.02%
01/99 $0.070 $0.056 25.00%
Net earnings for the quarter were $38.1 million or $0.23 per share, a $17.3 million (83 percent) increase over the prior year's third quarter figures. Analysts had expected SFA to report $0.21 per share in that quarter, leading the company to best quarterly expectations for the seventh consecutive quarter. SFA bested analyst expectations by more than 14 percent in the most recent quarter, led by record bookings and revenue figures. These record numbers also led analysts to increase their expectations for the fourth quarter, along with their year-end and year 2001 expectations. The fourth quarter revision was three cents, and the year-end upgrade was five cents. Year 2001 earnings were increased eight cents to $1.04 per share.
Keep in mind that a positive earnings revision is one of the single best indicators of future stock appreciation. According to well-documented research, stocks often see revision-related buying up to two months after the revision takes place. The fact that analysts have increased estimates for these three time periods is not unusual given that these same analysts' original estimates have consistently been at the low end of the range. However, these upgrades still point toward a very bullish outlook on the analysts' part for the future of SFA.
Analysts' ranking mirrors the revisions and the positive outlook on the company as 17 of the 19 analysts covering SFA stock rank it a Buy or Strong Buy. The remaining two analysts rank the stock a Hold based on the company's valuation and the turbulent future of tech stocks on the whole. Scientific-Atlanta is expected to grow earnings at a 23 percent annual clip for the next five years. The industry's average expected EPS growth is 25.7 percent, but this number reflects all the huge earnings figures expected by some of the industry's smaller companies. On the whole, a 23 percent growth rate over a five-year period is very strong in light of the size of Scientific-Atlanta. For comparison purposes, the average expected EPS increase on the part of all of the S&P 500 companies is 15.2 percent - so SFA is extremely well-positioned to grow earnings much more rapidly than most of these companies over the next five years.
The company's balance sheet remains a strong point, with a wealth of cash and short-term investments and very little intermediate to long-term debt. Cash and marketable securities were $40.4 million at the end of the third quarter, a 70 percent increase over the cash account in the third quarter a year ago. The company's increasingly stronger cash position leaves SFA officials with many weapons at their disposal for continued growth. For one thing, the company can easily acquire more companies without marring an otherwise immaculate balance sheet. SFA can also maintain its often lucrative policy of investing in ascending technologies. In the mid 1990's, SFA invested heavily in a new broadband technology company called Broadcom. Broadcom debuted in 1998 and the IPO still stands as one of the most successful offerings in history. Consequently, this success significantly boosted earnings for SFA in 1998. With the level of cash SFA currently maintains, the company could afford to continue this policy of investing in high-impact technology concerns.
From a ratio analysis standpoint, SFA maintains one of the strongest profit margins in the industry at 28.57 percent. Margins decreased slightly from 1998, but the 28 percent figure is still a very strong number. It is axiomatic that margins provide some of the the most crucial (if not the most crucial) analytical data for an equity analyst. The fact that SFA continues to improve margins and that this figure more than beats the industry average underscores a very healthy sales line for the company.
Ratio '99 Figure Industry
Current Ratio 3.48 2.09
Net Profit Margin 9.49 8.50
Debt-to-Equity 0.00 0.93
ROE 18.83 13.20
P/E Ratio 64.26 41.29
Net profit margin is more than 11 percent higher than the industry average, with the company netting 9.49 percent of revenues. Scientific-Atlanta has managed to lower its inventory turnover drastically over the years, and now reports a 72.87 turnover ratio. Essentially, SFA turns over inventory 5.09 times a year as compared to the 3.80 and 3.22 figures in 1997 and 1996, respectively. A faster inventory turnover helps provide cash flow and signifies a better inventory management system and possibly increased consumer demand. Return on equity, return on assets and return on capital are all at five-year highs.
Trading Points
Scientific-Atlanta shareholders enjoyed a banner year in 1999 thanks to the company's continued earnings surprises and heavy investor interest in the proliferation of fiber optic networks. No one wants the fiber optic revolution to become a pervasive reality more than Scientific-Atlanta, which relies heavily on bandwidth and full-scale broadband capabilities to operate its products at their full capacity.
1-year chart
In 1999, the stock gained 145 percent as the company increased earnings by 27 percent. SFA's tremendous upside in the cable TV arena gave investors plenty of reason to boost share prices. Note from the chart to the right, SFA charted a steady uptrend in 1999 that continued through the turn of the century to the high in mid-March. Since that record high in March, though, SFA has channel traded with a downward bias due to broader market weakness. With the Nasdaq {NASD} and S&P 500 {SPX} both trending sharply lower, expect SFA to continue to channel trade, as well. The last three months have been a case of broader market weakness holding down some of the stronger growth stocks. SFA is not overvalued at its current levels - unlike so many other technology stocks, and this selling must be viewed as overdone. In fact, SFA has held up rather valiantly despite the Nasdaq's falling nearly 35 percent from its highs. Year-to-date, SFA is up 99 percent.
1-year chart with Wilder RSI indicator and 30-day moving average
In the short-term, Scientific-Atlanta appears ready for a break of this recent downtrend. The stock's Wilder RSI indicator is trading close to oversold territory with a 39 reading. A reading below the 30 point level indicates that a stock is oversold. The Wilder RSI indictor can be viewed in the bottom portion of the chart above and to the left. Notice the red indicator line is trending lower and moving close to the oversold point (the horizontal red line at the bottom of the chart). The stock is also trading significantly below its 30-day moving average line - more than 16 percent lower than the smoothed average line. SFA is, however, trading above its 150 and 200-day moving averages - a sign of long-term strength for the stock.
SFA's 3-month return against the Nasdaq's 3-month return
Despite the overwhelmingly bearish sentiment in the marketplace over the last three months, Scientific-Atlanta has managed to stay positive throughout this turbulence. Note to the left, the charted three-month returns for both SFA and the Nasdaq Composite Average. The red line indicates SFA's return against the blue line of the Nasdaq. The Nasdaq is now off 24 percent from its close three months ago, while SFA is only slightly negative - signifying the stock's resiliency in the context of the technology selloff.
Overall, in the short term, SFA appears to be strong. The stock is trading near the oversold line on the Wilder RSI indicator and is still trading within a loose channel from 65 to 49. If the technology woes end soon, SFA could see some heavy buying as investors funnel back into leading-edge tech stocks such as Scientific-Atlanta.
The Bottom Line
Scientific-Atlanta is obviously the major player in the cable set-top box community. The fact that this community continues to expand every year only plays into the hands of this Georgia-based cable giant. Over the next five years, SFA is expected to grow earnings at a 23 percent clip. Additionally, the company claims that it is only getting started with the fully-interactive experience. The future is super bright for Scientific-Atlanta and the stock price should reflect that prospect.
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SFA has it's 200DMA @ 41.50, so I'd be tempted to wait for
that level to start nibbling. we around 50.375 on SFA
QCOM down to 60.... the heat is on. Korea's market may
not account for as many sales as forcast.
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