People love their TVs, and that's good news for Scientific Atlanta (NYSE:SFA). This maker of set-top boxes and other equipment used in the transmission of TV and broadband posted a solid fourth quarter, thanks in part to ongoing demand for increasingly sophisticated products.
The company posted 15% higher revenue for the quarter as strong sales of subscriber products (up 22%) offset weakness in the smaller transmission products business (down 6%). With the product mix shifting toward higher-end products and the company continuing to drive efficiencies, adjusted operating margin improved by nearly 3% year over year.
Earnings are confounded a bit by a sizable settlement expense ($53 million) recognized during the quarter. Roughly half of this amount relates to the settlement of patent litigation with Gemstar-TV Guide (NASDAQ:GMST), whereby the two companies agreed to a cross-licensing and porting agreement. The other half is a reserve for a tentative settlement with the government in regard to an investigation of marketing support agreements with cable operators Adelphia and Charter Communications (NASDAQ:CHTR) back in 2000 and 2001.
Excluding the charges, the company posted nearly 42% higher net income for the fourth quarter. What's more, both revenue and adjusted income surpassed Wall Street estimates.
Fools should also note that the company posted somewhat sluggish-looking numbers for new orders and backlog. New orders of subscriber products were flat on a year-over-year basis, orders for transmission products were down 8%, and reported backlog fell 6%. I'm not terribly concerned, though, since backlog isn't always a reliable predictor of future sales in this business. Orders can jump around from quarter to quarter, and the company continues to gain new or follow-on business from the likes of Motley Fool Stock Advisor selections SBC (NYSE:SBC) and Time Warner (NYSE:TWX).
I think there's still plenty of growth potential in the TV and TV/broadband equipment market. HDTV is still in its infancy, as are cable broadband and video services from telephone operators. Assuming that all three of those markets continue to grow, there will be a strong ongoing demand for new equipment.
That said, there just doesn't seem to be a huge amount of value in Scientific Atlanta's shares. The stock has been on a tear since April, and I can't see enough margin of safety to make for an appealing investment. More aggressive investors who aren't troubled by the valuation might want to look here, as well as at potential turnarounds such as C-COR (NASDAQ:CCBL) and Harmonic (NASDAQ:HLIT).
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
