BUSINESSWEEK ONLINE : NOVEMBER 20, 2000 ISSUE
BUSINESSWEEK INVESTOR -- INSIDE WALL STREET

Three-Five Systems Is Set for a Show


Money manager Graham Tanaka has scored a feat in this tech-wreck market: His tech-heavy Tanaka Growth Fund is up more than 15% this year through Nov. 3, compared with a 2.5% loss for the Standard & Poor's 500-stock index. In 1999, the fund's first full year of operation, it gained 58%, vs. 21% for the S&P. Tanaka's ace: He invests in what he calls the ''enablers and beneficiaries of the digital revolution.'' This ''productivity-based'' bull market, he argues, has years to go. One stock he thinks will be a big beneficiary: Three-Five Systems ( TFS), a leader in making liquid crystal display ( LCD) modules for cellular phones and handheld consumer and office electronics gear.

''Three-Five is the best pure play in the handheld LCD market,'' says Tanaka. Its largest customer is Motorola (85% of sales), which uses LCDs in its mobile handsets. LCDs increase speeds and reduce costs in displays, says Tanaka.

TFS is also developing liquid-crystal-on-silicon microdisplay technology, designed for such markets as HDTV, wireless Net appliances, and business projectors. It is a flat panel the size of a thumbnail. TFS has signed pacts with Nikon, Samsung, and InFocus for products with microdisplay technology. ''We expect microdisplay sales of $20 million in 2001,'' says Tanaka.

Three-Five stock hit 80 in May on excitement over the microdisplays. But later, worry over Motorola's delayed orders pulled the price down to 35. Tanaka thinks the problem is temporary and expects sales to Motorola to jump next year. He sees core LCD revenues growing at least 50% in 2001 and a further 30% to 40% in 2002 and 2003. TFS should earn $1.17 a share on sales of $280 million in 2001, and $1.72 on $400 million in 2002. The stock, now at 32, deserves a price-earnings ratio equal to its 35% growth rate, says Tanaka. His two-year target: 60.

By GENE G. MARCIAL

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