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Technology Stocks : THREE FIVE SYSTEM (TFS) - up from here? -- Ignore unavailable to you. Want to Upgrade?

To: dfloydr who wrote (2283)	8/21/1998 8:10:00 PM
From: Noblesse Oblige	Read Replies (1) \| Respond to of 3247

Hi D Floyd... Clinton and TFS? Wow, what a combo. I hate to think of it. Your comments are on the money. These guys don't know what they are doing. My own assessment of fundamentals is that the company will actually get the ramp it has been predicting in Motorola digital, but prices have been cut 10% (all coming directly from the bottom line). The ramp will be categorized by fits and starts, and is still dependent on market acceptance of the product line. Other customers haven't yet been built to pick up the slack, but it is clear that with lower pricing, some additional cell phone manufacturers will be brought in as customers. Look for them to get the same price breaks as MOT, so incremental sales will be profitable, but overall margins will be less than expected. New technologies may eventually come on, but the company is behind in developing almost everything it is working on. LCiD, for example, was estimated to be accountable for a 35% revenue increase in 1998 (by the Board Chairman) during the 1997 annual meeting. I have never seen any public alteration of that prediction, which goes to prove that the company doesn't communicate changes in expectations gradually, preferring the "shock" method that we have seen on a couple of occasions over the last few years. Siliscape is a potential big positive, and TFS clearly has an advantaged position, as it was brought in as an investor because of its cell phone relationships. Eventually, that product will provide meaningful revenue flow, but it isn't yet clear whether this company can convert that to a decent margin increase. Look for 1999 revenues of about $120 million (which was the amount originally expected to be nearly achieved for 1998), and operating margins declining to the 20% level. The recent expansion (and continued plans to open in China) increase operating risk as fixed costs have been dramatically increased so the company can handle unit volume growth, though it isn't really clear that the rate of return on the new assets will be adequate justification for the risk. Continued relatively high R&D expenses are a necessity, and SG&A costs will continue a regularized rise of modest proportions over the next couple of years. All things considered, a rough guess for 1999 would be $24 million in operating profits (20% of $120 million), R&D of $6.5 million, SG&A of $8.0 million, for pretax income of $ 9.5 million. After taxes at 40%, 1999 earnings of $5.7 million on 8 million shares, for fully taxed per share earnings of about $.70. Risks continue to be pricing, inability to get new technologies to market on a timely basis, and foreign currency related problems. You can call your own valuation. Single digits are obviously too low, and most Phoenix area observers actually believe the company will repurchase shares this time. (Call me a cynic on that one, but time will tell!) But, there will be absolutely no earnings momentum, and there isn't a snowball's chance in Hades that this management group will be able to sell a now disgusted Wall Street (clearly afraid of them as a management group!) on the "vision thing." If they buy back some stock, next year's numbers will look a little better, but the company will look more highly leveraged. In retrospect, not selling additional equity or convertibles early this year (when it would actually have helped the shareholders in the area of liquidity and coverage) was a PROFOUNDLY STUPID DECISION, ENTIRELY PREDICTABLE, FOR WHICH THERE ISN'T A CHANCE OF AN EXCUSE !!!!!!! You can credit that one to the guys at the top, who obviously didn't learn anything in MBA 101. Raise money when you are able. They won't be able to do it at reasonable cost now, and any additional coverage that would come from an underwriter and/or its partners would be seen for precisely what it is, a palliative to management to get the deal. All in all, you can decide on the basis of my outline what the stock is worth. From my perspective...more than here. How much more? It depends on the market, how many shares are repurchased under the current authorization, and whether the dollar declines versus far eastern currencies (which might improve some of the company's pricing power, making a modest "surprise" possible for next year). For what it is worth, it is my understanding that Dave Buchanan is telling locals that TFS will earn a buck next year. My response: Hahahahahaha!! When was the last time he was right about anything? <G> Have a good weekend in spite of it all. Maurice...please check in. We are thinking about ya.