DRIP PORTFOLIO

The Drip Portfolio
Scientific-Atlanta vs. General Instrument

By George Runkle (TMF Runkle)

ATLANTA, GA (Nov. 15, 1999) -- Over the past few weeks I've been looking at Scientific-Atlanta (NYSE: SFA). Before I conclude this long series, I want to look at two more items -- its competition and its finances. The former is fairly simple since there is only one competitor: General Instrument (NYSE: GIC). During this past week I spoke to Denton Kanouff, General Instrument's vice president of marketing for digital network systems, about his company and its place in the market.

First off, the market for cable network systems and set-top boxes is basically a "duopoly" between Scientific-Atlanta and General Instrument. General Instrument is the larger of the two and has shipped 40 million out of a total of 65 million systems. General Instrument provides two set-top boxes for broadband cable. The core interactive unit provides video on demand, Internet access, and e-mail and sells for less than $300. The upscale model, the DCT 5000+, has the following capabilities (according to the General Instrument website):

  • MPEG-2 video & Dolby� Digital Audio
  • Exceeds Open-Cable requirements
  • Built-in DOCSIS cable modem
  • Triple-Tuner TM architecture for simultaneous watch, talk 'n surf
  • High definition television support
  • Open architecture supports downloaded third-party software applications
  • 32-bit true color/3D graphics
  • Real-time interactivity
Now, let's look at a comparison of some selected numbers for the two companies:
                           General      Scientific-
                           Instrument   Atlanta
Return on Equity             8.40       16.32
Return on Assets             6.51       11.10
Gross Margin                29.06       28.82
Operating Margin            11.86       12.05
Profit Margin                6.74        8.43
Rev. Growth (5 yrs.)        11.74       10.47
Rev Growth (1 yr.)          12.68        5.25
Day Sales Outstanding          57          73
Invent. Turnover/90 Days:     2.4         1.7
Sometimes when I compare two companies' numbers, it seems obvious that one is being squashed by the other. This doesn't appear to be happening here. Let's get away from the numbers and look at some other interesting developments for General Instrument. The most important is that Motorola (NYSE: MOT) has acquired it.

Motorola is the leader in cable modems, according to Mr. Kanouff, and also will provide the core technologies for further development of set-top boxes and networking equipment. Also, Motorola has a strong brand name, which will be an advantage for selling their set-top boxes on the retail market. This merger will be complete in early 2000. What is interesting for us as Drip investors is that while General Instrument does not offer a Drip plan, Motorola does. We'll need to look at Motorola closer in the future.

Finally, our discussion went on to the cable business in general, and Mr. Kanouff confirmed everything I was told by the folks at Scientific-Atlanta. That is, there are some other competitors, such as Sony, coming into the set-top box arena. However, there are significant barriers to entry. The boxes have to be a system with the cable network, so unlike PCs, you can't easily build a set-top box in your garage. The network systems for the cable company are quite complex and require a high degree of competency. Both General Instrument and Scientific-Atlanta have strong relationships with their customers -- this makes breaking into the business difficult. Mr. Kanouff, however, did disagree with the Scientific-Atlanta folks about who made the better product.

What is my conclusion? We're into an opinion area here, since there isn't definitive evidence that one company is overwhelming the other. So far, it looks like Scientific-Atlanta is still in the running for a Drip investment. I'm also looking forward to studying Motorola. Next week we'll look closely at the numbers from Scientific-Atlanta and conclude this series. After that, I want to veer off the road from Pathfinder companies for a few weeks and write about something I'm intimately familiar with -- building supply companies such as Home Depot (NYSE: HD).

Drip Portfolio

11/15/99 Closing Numbers
Ticker Company Dly Pr Chg Price
CPBCAMPBELL SOUP-3/16$44.63
INTCINTEL CORP-2 1/8$74.06
JNJJOHNSON & JOHNSON-1/4$103.50
MELMELLON FINANCIAL CORP-13/16$38.38

  Day Week Month Year
To Date
Since
7/28/97
Annualized
Drip -1.68% -1.68% -1.24% 16.68% 32.70% 13.07%
S&P 500 -.12% -.12% 2.31% 13.44% 48.53% 18.75%
S&P 500(DA) -.12% -.12% 2.31% 14.02% 51.15% 19.65%
S&P 500(DCA) n/a n/a n/a n/a 26.59% 10.78%
NASDAQ -.05% -.05% 8.53% 46.83% 105.12% 36.62%

Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
9/8/9721.0839INTC42.592$74.0673.89%
11/14/9711.258JNJ79.965$103.5029.43%
11/5/9825.5267MEL34.137$38.3812.41%
4/13/988.174CPB54.586$44.63-18.25%

Trade Date # Shares Ticker Cost Value LT $ Val Ch
9/8/9721.0839INTC$898.01$1,561.53$663.51
11/14/9711.258JNJ$900.24$1,165.20$264.96
11/5/9825.5267MEL$871.40$979.59$108.18
4/13/988.174CPB$446.18$364.76($81.42)
  Cash: $24.38  
  Total: $4,095.46  


Key
• S&P 500 (DA) = dividend adjusted. Dividends have been added to the total return of the index.

Note
Drip Port launched with $500 on July 28, 1997, adds $100 to invest every month, and the goal is to own $150,000 in stock by August of the year 2017. Due to the slow nature of dollar-cost-averaging and our relatively significant starting costs, we do not expect to seriously challenge the S&P 500 for the first three to five years as we build an investment base. The long-term advantages of dollar-cost-averaging still overcome the short-term disadvantages, however. Final note: our investment in Campbell Soup is frozen due to fees instituted in its investment plan. Click here for a history of all Drip Port transactions.