Dec 13, 1999 at 12:00AM
When I studied revenue growth at the company, my first concern was that increases in the past few years have been rather low. For example, revenue growth was only 5.3% the past year, and 5.9% (annualized) over the past three years. The reason for this was a recent decline in revenue from overseas operations. It appears that the overseas markets are starting to rebound, though, and we can see some improvement already in the past quarter's numbers.
The most interesting aspect of the meeting was our discussion of future growth possibilities. Checking on the statistics from the National Cable Television Association, 1.4 million homes are served by digital cable right now. By 2005, they expect digital cable will reach 35.1 million homes. That's an annualized increase of 156%. Significant buildup in infrastructure is needed to get both the digital transmission and the reverse return path. This confirms what Mr. Haislip talked about regarding projected industry growth.
Right now, the leaders in the cable analog world are General Instrument (NYSE: GIC) (with a 60% market share) and Scientific-Atlanta (30% market share). Mr. Haislip feels that Scientific-Atlanta has a good chance of increasing its market share in the digital area because the company has gone to full interactive transmission from the start. Their largest client, Time Warner Cable, wanted full interactivity immediately. General Instrument first provided digital broadcasting at the request of its major customer. However, with the acquisition of TCI by AT&T (NYSE: T), everybody is in agreement with full interactivity now, according to Mr. Haislip. He concedes that General Instrument did beat out Scientific-Atlanta in going digital. However, Scientific-Atlanta has full interactivity in its products, and Haislip feels that gives the company an advantage over General Instrument.
Continuing our discussion of future growth, Mr. Haislip said that he believes digital systems will begin to see significant growth in Europe, South America, and Asia in the next year or two. Until now, he says, there has been little movement in those markets, but in the future there will be a great amount of growth. This is interesting since we are looking at the possibility of significant growth already in the United States.
A few other items came up in the discussion that were of interest. First, we discussed the branding issue. Motorola (NYSE:MOT) is acquiring General Instrument, and I asked Mr. Haislip if he thought the Motorola brand will help his competitor in the future retail market for set-top boxes. Mr. Haislip feels that it will be a number of years still before we see retail sales of the set-tops, so this is not such an important issue. One item he mentioned was the high market cap that was awarded to General Instrument through the Motorola acquisition. General Instrument now carries a P/E of 93; Scientific-Atlanta has a P/E of 42. Mr. Haislip feels there is a great amount of unrealized value in Scientific-Atlanta's stock right now.
I also talked to Mr. Haislip about the competition cable companies are seeing from the companies providing direct satellite transmission to television sets. He felt that the competition from the satellite transmission companies will help Scientific-Atlanta since they cannot yet provide the two-way service that digital cable can. The competition will give cable companies incentive to upgrade their networks to interactive digital, increasing business for Scientific-Atlanta.
I've drawn a couple of conclusions from my visits to Scientific-Atlanta, and also from speaking to a neighbor who works for them (gather intelligence on companies wherever you can). First, the growth in cable is there -- not because people want to watch more TV, but because Internet access is driving the growth, along with the interactivity. Second, if General Instrument had a direct investment plan, and were not acquired by Motorola, I would choose them over Scientific-Atlanta. Sorry, but I like to go with the # 1 guy. However, that isn't the case. Those are two big "ifs" that aren't.
We will soon only have one pure play available to us in the digital cable business, and that is Scientific-Atlanta. It will be the only company that we can invest in through a traditional direct investment plan to get the full benefit of what may be phenomenal growth in cable. Finally, I am of the opinion that Scientific-Atlanta is one of the few companies that will benefit from the huge growth that we will see in the Internet that isn't affected by what I believe is a speculative mania of many of the dotcoms.
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- Dec 13, 1999 at 12:00AM
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