Updated from 11 a.m. EDTScientific-Atlanta ( SFA), manufacturer of set-top boxes and other cable TV equipment, is at the center of a Wall Street shouting match. On Wednesday, two sell-side analysts issued positive reports on S-A, with one of them saying he was 90% certain S-A had won a major new cable TV industry customer. (That view was borne out by events Thursday afternoon.) Meanwhile, a bear on the stock says that despite the company's indisputable strengths, customer concentration and other issues foreshadow ugly surprises. The difference of opinion illustrates how turbulence in the cable TV market is spreading beyond the local system operators at its core to industry suppliers. S-A's shares, boosted by positive comments Thursday morning from Morgan Stanley, rose 29 cents to $14.51, leaving them 54% below their 52-week high.
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Of greatest interest to S-A investors Wednesday was a report from Needham analyst Anton Wahlman indicating that New York-based cable system operator Cablevision ( CVC) most likely had selected S-A as its new major vendor for advanced digital cable equipment, supplementing Sony ( SNE), previously Cablevision's sole supplier of the technology. (Wahlman has a strong buy rating and a $28 price target on S-A; his firm hasn't done underwriting for the company.) Because the 3 million-subscriber Cablevision is one of the biggest operators in the industry, the new customer would represent the second piece of good news for S-A in recent weeks. The first came earlier this month, when S-A announced an agreement to resume shipments to Adelphia Communications ( ADELQ), the troubled cable operator that filed for bankruptcy protection earlier this year, saddling S-A with an after-tax writeoff of $55.2 million in the fourth fiscal quarter ended June 28. Cablevision, which earlier this month had told analysts it would be adding unnamed suppliers to supplement Sony, Thursday afternoon confirmed it had set a deal with Scientific-Atlanta, boosting the stock mildly in a mixed day for the market. Separately, Deutsche Bank analyst Peter Ausnit slightly raised his high-end estimates on S-A Wednesday, citing factors including the new deal with Adelphia and expected stabilization in average selling prices on the company's advanced set-top boxes. Ausnit has a strong buy on S-A; his firm is an S-A shareholder and has done recent investment banking for the company.
That Cablevision and Adelphia wins would be considered good news for S-A is a testament to the tough times faced by cable-equipment suppliers, as their customers deal with unprecedented investor skepticism about their ability to generate free cash flow. After all, Cablevision vowed earlier this month, as did other cable operators, to cut capital spending. (S-A's biggest competitor in the cable business is Motorola ( MOT).) But S-A's supporters say the company is well positioned, despite these industry difficulties, partly because cable operators, in competition with satellite services, won't turn their back on the billions they've invested in system upgrades. "Even in a troubled company like CVC, they've got to go forward with their strategies," says Tom McIntyre, president of Dessauer & McIntyre Asset Management, a longtime S-A shareholder. "Otherwise, they're just going to lose it to satellite. ... Cable can't turn back." Bulls also point to S-A as a value play, what with the company's microscopic debt, $730 million in cash on hand -- $4.62 per fully diluted share -- and expectations of roughly a dollar in earnings for the fiscal year ending next June. "It doesn't take you much imagination to get to $20 on that," says McIntyre. Despite those arguments, skeptics such as Merrill Lynch telecom equipment analyst Tal Liani aren't swayed. Liani, who has a sell rating on S-A, acknowledges that the company is a cash cow, and that management -- which announced two separate staff cutbacks in recent months -- is quick to cut costs. But, he says, a variety of factors indicate that S-A's growth is threatened, and any new business the company might win from Cablevision will be slow to ramp up. Among the trouble spots are the near completion of transmission-equipment spending among major operators in the U.S., along with the apparent retreat on such spending from an important European customer, the German operator Kabel NRW. One of the biggest risks, says Liani, stems from his contention -- disputed by people such as Ausnit -- that AOL Time Warner ( AOL), which accounts for roughly half of S-A's set-top box sales, is buying boxes at a greater rate than it's installing them, and eventually will cut back "aggressively" on its orders. "There could be one nasty quarter where shipments go down substantially," says Liani. The analyst, whose firm hasn't done recent underwriting for S-A, has a sell rating on the stock.