Nov 22, 1999 at 12:00AM
"You missed the relationship with GIC and AT&T.... Back when TCI was a cable TV operator (early this year) it bought into GIC. Now that AT&T holds TCI it will be like the old days of Western Electric and AT&T. Western Electric was a captured OEM of AT&T. A good way to hide the profits from the IRS. Vertical integration to the max. My cynical self says GIC's the better play of the two. GIC has a deep-pocketed business partner in AT&T."
This is an interesting issue to investigate; however, General Instrument does not have a direct investment plan and Scientific-Atlanta does. When General Instrument is acquired by Motorola (NYSE:MOT), which has a Drip, we're going to have a more diversified communications company that is worth exploring. For a pure cable play, though, Scientific-Atlanta still remains.
I had hoped to visit Scientific-Atlanta one more time to talk about their finances, but we never did manage to work that out and I'd like to finish this series. So, I'm going back to the SEC forms 10-Q (quarterly report) and 10-K (annual report) from our own Quotes/Data area. Dusting off my Financial Management and Financial Accounting textbooks, we find loads of ratios and performance measures. All of these are valid, but I only have so much space for this column. You could struggle through the same texts, but I suggest The Motley Fool Investment Workbook for the same methods (blatant promotion). It's the same information, but said in a lot less words and easier to read.
I figured sales growth was the most important measure; we covered some of that in last week's column. The sales growth for the past year for Scientific-Atlanta is a measly 5.25%, and the past five years is 10.47%. In some earlier research, I found the top-half performers of the Pathfinder companies had a greater than 27% growth rate (annualized) in the previous five years sales. Unfortunately, Scientific-Atlanta doesn't pass this test. However, in the past quarter, the company's sales jumped 35% from last year in the same quarter. That's very significant, and probably is the reason behind the stock's recent strong performance. General Instrument has registered an increase of 5% in the same period -- however, in the past year they had a 12.68% increase in sales.
Also, I wanted to see how Scientific-Atlanta was doing in market share. The cable market is increasing quite a bit, as I'll discuss further on, so there is plenty of expansion available. However, if Scientific-Atlanta is losing market share, the market can expand all it wants, and it won't help us. Let's assume the product mix of Scientific-Atlanta and General Instrument has stayed the same over the past few years, and we'll look at how their sales have been relative to one another. If one company's sales are going up or down relative to the other, we can assume market share is being lost or gained. This past quarter, Scientific-Atlanta's sales were 64% of General Instrument's. Last year, they were 59%, the year before, 66%. So, over the past three years I don't see any noticeable trend.
As I mentioned several weeks ago, the National Cable Television Industry Association stated that 19.5 million homes are reached by high-speed cable. By 2005, over 67 million homes should be reached by cable. This is an annualized growth rate of 19%. The increase in digital cable is more impressive. Right now, 1.4 million homes are reached; in 2005, it should be up to 35.1 million. This represents an annualized increase of 156%. These changes will mean additional networking equipment, cable, and set-top boxes sold. So, if we go on to make an assumption that Scientific-Atlanta will at least hold market share, the increases in sales over the next few years will probably be quite significant.
So, do I feel Scientific-Atlanta is a Pathfinder? Let's look at it from the criteria we've come up with so far:
1. Familiarity With the Company -- Originally I said, "No." I don't watch much TV, so I had no interest in set-top boxes. However, the newer interactive boxes are opening up the Internet to wider access. Look at what you can do on the Net: get news, chat, shop, work. Cable access will open this up for everybody.
2. Sales Growth Over 27% in the Past Five Years -- No. This could be a disqualifier, the judgment call is whether this company will do better in the future. I feel the evidence is there that it will do better for reasons I've covered earlier.
3. Bringing Communications to the Masses -- See #1 above. Televisions are in an overwhelming majority of houses. Cable is carried almost everywhere now, so the set-top boxes and broadband cable will be bringing a new level of communications ability to everyone. No longer will it take an investment of $1,000 or so for basic computing ability. (I know there are free PCs out there; the Gateway ads say they exist along with Bigfoot, UFOs, and the Loch Ness Monster.)
In summary, I think Scientific-Atlanta does qualify for Pathfinder status. As always, I suggest you do your own research, too. Some time in the future, we'll look at Motorola, which will allow us to invest in General Instrument. Next week, I'm going to divert a bit and start a several-part series on home centers such as Home Depot (NYSE: HD) and Lowe's (NYSE: LOW). After that, we'll get back to Pathfinder companies.
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