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After August Surge, S-A Shares Swoon

Shares in Scientific-Atlanta Inc., at a 52-week high just two weeks ago, were hammered last week by an unfavorable analyst report and news that a large set-top-box order went to a competitor.

S-A shares dropped $11.38 each, or 12 percent, to $82 Aug. 14 after Gerard Klauer Mattison & Co. Inc. analyst Michael Cristinziano downgraded half of cable's set-top duopoly from "buy" to "neutral."

Cristinziano also cast doubt on S-A's long-term growth prospects. "Despite our expectation of strong near-term execution and earnings performance, we believe S-A's recent growth rate is unlikely to be sustained over the long term," he wrote.

The next day, Aug. 15, S-A shares slid another 5.8 percent, or $4.75, to close at $77.50 apiece. That drop, some analysts said, was aided by a big set-top-box order that AT & T Broadband placed with Philips Consumer Electronics Co.

AT & T Broadband agreed to buy up to 1 million digital set-tops from Philips as a secondary supplier to Motorola Broadband Communications Sector. Financial terms were not disclosed.

S-A shares continued to slide in early trading Aug. 16, down $3.38 each to $74.13.

Cristinziano cited eight separate reasons for his downgrade, including weakening transmission-system demand from U.S. cable operators, an expected decline in digital set-top prices and an undeveloped telco market for S-A's optical products.

Cristinziano also believes a potential spinoff of S-A's Power-TV Inc. operating-system unit will likely not increase shareholder value, and cited concerns regarding pending patent-infringement lawsuits by Gemstar-TV Guide International Inc. regarding S-A's interactive programming guide.

S-A had enjoyed a nice run earlier in the month. Its share price surged $14.44 between Aug. 3 and 11, hitting a 52-week high of $93.38.

GKM first issued its "buy" rating on the stock about one year ago, Cristinziano wrote in the report "and after a 466 percent stock appreciation over this period, we are taking our profits."

Josephthal & Co. Inc. analyst Lawrence Harris said that run-up helped to encourage the sell-off. "Sometimes after a run of such magnitude, some profit-taking is inevitable," he said, adding that he didn't see the Philips order as a major blow to S-A.

S-A was never really in the running for the AT & T Broadband order because the MSO wanted a set-top that could also be sold at the retail level. While S-A is well-known in the cable industry, Philips has a stronger retail brand name.

Harris also believes-contrary to Cristinziano-that S-A has a bright future for its transmission-systems segment, led by the optoelectronics business, which is growing by 100 percent per annum.