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Summary

  • Recently the Taser Inc stock price has climbed by over 18% due to hype related to the Ferguson Crisis.
  • The Stock now trades at a 1 Year Forward P/E over 33x.
  • The company is now overvalued and the recent Ferguson crisis is not justification for this price spike.
  • In this article I will detail my bear case.

Summary:

Taser Inc. is a developer and manufacturer of conducted electrical weapons, body cameras, and accessories. These products are purchased by law enforcement, military, and private security companies across the globe. In the past week, (NASDAQ:TASR) shares have surged over 18% due to the riots in Ferguson, Missouri. I believe the price surge is nothing but speculation and hype, and I will detail my bear case below. The increase is equal to 1 full year of revenue and 8 years of net profit ($155 million 2014 revenue x 12% net profit).

Bear Case:

Taser International is a great company. According to the latest earnings call which took place on July 30th, the company has experienced ten consecutive quarters of double digit growth. But the recent riots & protests in Ferguson, Missouri have brought a new level of speculation to the stock that I believe is unwarranted. In the past 4 trading sessions (August 13th, 2014 through August 18th, 2014), the stock has added over $150 million in market cap to a $620 million dollar company.

Future Order Growth from Crises (and in general) is Uncertain:

While riots and abuse of power by police certainly make a great case for a company that manufactures law enforcement body cameras, the truth is that these type of events are unlikely to lead to any new sales in the short term. Police departments take time to test new products and get them on the streets. There is also the issue of budgets. If a police department can come by the money at all, they often need to get funds approved for purchase of new equipment. This is something that can also take a good amount of time. I believe there will be demand for these type of products in time, but it will be a slower adoption than speculators are anticipating.

Taser can issue guidance and monthly press releases regarding their sales - but the truth is this: future sales are hard to predict when they are on a case-by-case basis from individual law enforcement agencies that may or may not want a piece of luxury equipment for their officers. Taser's new sales are based on cold calling law enforcement departments and while they may all admire the body cam technology, they may not have the money or the need for it. I will now explain the difference between "want" and "need" equipment and why body cams are not a necessity.

Luxury vs Necessity:

Taser International is a company that relies significantly on new product sales. Body cameras are a law enforcement luxury at this time. There is no law requiring police officers to wear body cams. They do not absolutely need body cams like they absolutely need guns. Body cams have positives and negatives. They can provide solid evidence against a criminal. But they can also provide evidence against a police officer who doesn't exactly follow procedure, and expose departments to huge amounts of liability. The potential liability of one case could end up costing far more than body cams for a whole department. I believe this is another reason why body cams may never be a necessity and may always remain a luxury.

How many cameras would Taser have to sell to justify a $150 million increase in market cap?

$150 million is equivalent to roughly one year of revenue for Taser International. The likelihood of one event causing a strong increase in short term demand (1 year or less) of $150 million - in my opinion - is highly unlikely. Taser would have to sell 375,000 Axon Body Cameras at $400/unit or 250,000 Axon Flex Camera Glasses at $600/unit in order to bring in $150 million of revenue. According to FBI.gov, in 2011 there were just over 1 million full time law enforcement employees in the United States. For one event to cause such a short term surge in demand for Taser's products, the demand would need to be a size that would be able to outfit at least 20% of the nation's police force(according to FBI.gov numbers). It seems to me that this type of demand is highly unlikely from the Ferguson event. At best, I think the crisis in Ferguson will raise awareness for the need for such products, and maybe produce a couple of orders in the short term.

Competition:

Taser International is not the only company that makes body cameras for law enforcement officers. The company has to compete with Digital Ally, Inc (NASDAQ:DGLY) who also makes body cameras. Admittedly, Digital Ally is a much smaller company.

Conclusion:

With all of that said, I don't believe there is a strong case for Taser International's 33x Forward P/E resulting from the Ferguson Missouri crisis. Body cams are a luxury, not a necessity in law enforcement. The crisis these past couple of weeks has not guaranteed any new orders from police departments, and therefore I believe the stock price is overvalued. If you are a long investor, I would take caution at these levels.

Source: Taser International Inc: Price Spike Not Justified By Ferguson Crisis