No Hand Wringing Allowed — Focus on the Future
By Marc H. Gerstein
Market Guide, Director of Investment Products
I first wrote about SCIENTIFIC-ATLANTA (SFA) for The Telecomm Analyst on June 27, 2000. The date is just about all you need to know if you want to figure out how what`s happened to the stock. Like most others in the communications equipment industry, SCIENTIFIC-ATLANTA got slaughtered. At its close of $39.75 on Jan. 4, 2001, SCIENTIFIC-ATLANTA has lost 44% since the first article — and that includes a nice bump higher after the Fed cut rates on Jan. 3.
A major factor was valuation. The original article did express concern about what was then a P/E of 60 based on estimated earnings for the year ending June 2001. That ratio, by the way, is well above the projected long-term growth rate for the company. But that was still back when anyone who wanted any sort of decent communications play had to accept high valuations or leave the table.
In retrospect, those of us who invested wish we had left that table. But experiences like this are an inevitable part of every investor`s career. Rather than wring our hands about what we should or should not have done, it`s more constructive to look forward and decide what to do next.
Often, in communications, when we look ahead, we see a story that isn`t as bright as we once expected. In the case of SCIENTIFIC-ATLANTA, there are concerns about the near term. But the big picture looks, if anything, a bit better.
SCIENTIFIC-ATLANTA makes cable TV transmission equipment and set-top boxes. It`s very profitable, and appears often on a variety of fundamental Market Guide screens, most recently on the one we call Relative Growth.
The widening deployment of broadband is a large element in the case for investing in SCIENTIFIC-ATLANTA. Six months ago, you could easily have argued that DSL was gaining momentum at the expense of debt-laden cable operators whose Internet services were being bashed as less secure. But from where we stand today, things look different.
Debt isn`t necessarily the ideal type of capital, but it sure as heck beats what many recent telecom superstars have: no capital at all — and no earnings to tide them over until they can raise some. Meanwhile, as we learn more about consumer broadband, we`re starting to see that the security gap between DSL and cable modems may not be so wide, and that everyone could benefit from one of the new consumer-oriented firewalls coming into the retail software market. Early word of mouth on the firewalls from cable modem users is positive, even among users who are networking pros and understand all the shared bandwidth rhetoric.
It`s still too early to predict a broadband winner — remember, we also have to consider wireless. But as of now, cable seems a much stronger player than it did six months ago. And that`s good news for SCIENTIFIC-ATLANTA, which is ideally positioned to benefit from the large-scale rollout of digital set-top boxes. And actually, Internet probably isn`t even the first real "killer app" for the company — that was video on demand.
There is a near-term concern. AT&T (T) is slowing its pace of capital spending. RCN (RCNC) has also cut back its planned network expansion. Those developments led other cable equipment suppliers such as TERAYON COMMUNICATIONS (TERN) and HARMONIC (HLIT) to warn analysts and investors that fourth-quarter revenue and earnings will be lower than expected. Some analysts suggest that these pre-announcements reflect concerns that won`t affect SCIENTIFIC-ATLANTA. Others say the company eventually will be hit.
The SCIENTIFIC-ATLANTA bulls make good cases, though prudence suggests that investors should assume that there may be a hitch or two in the company`s near-term progress. And be aware that these aren`t the old days, when stocks reacted slowly to unfolding expectations. Today, prices move early and quickly. SCIENTIFIC-ATLANTA`s PEG (P/E-to-growth) ratio is now a shade below 0.70. That`s pretty good for any stock, and it`s especially noteworthy for SCIENTIFIC-ATLANTA, a stock that I`d been seeing as overvalued ever since I first noticed it in the early 1980s. Those looking for worthy averaging-down opportunities may have something here.
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|Autor (Datum des Eintrages):||junkstro (09.01.01 12:22:06)|
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