Taser Zaps Doubters

| About: Axon Enterprise, (AAXN)

In my previous article on TASER (TASR), I suggested that the Trayvon Martin tragedy might be a catalyst for the use of non-lethal weapons for self defense instead of guns. It looks like the world has been starting to go in that direction even without this tragedy.

TASER reported an electrifying first quarter 2012, with net sales of $25.6 million, beating estimates by $3 million and $0.07 earnings per share, beating by $0.06.

Sales increased 10.9% over first quarter 2011 sales, mainly because of continued adoption of the new Taser X2, and a big order to the US Army for the Taser X26. Many new orders of the X2 came from law enforcement agencies around the United States.

From the first quarter, 2012 conference call, CEO Rick Smith expects strong sales to continue over the year. Over the last couple years, because of the recession and budgetary reasons, law enforcement agencies haven't replaced their capital equipment. Now they are starting to replace their equipment, and that's good for TASER. The company is also seeing traction in its video segment. The company has many pre-orders for its AXON Flex product for May, and expects many bookings for the back half of the year.

TASER has historically focused on selling its products to the army and law enforcement agencies rather than to civilians. That's because government purchases have legitimized the products and is a testament that they are effective and practical. This will increase civilian use. People defending their home and neighborhood watch people might purchase a TASER instead of a gun since they know it's effective enough for law enforcement use.

Sales to the US military, which is the most modern military in the world, will also encourage sales to other countries. From the quarter 1, 2012 conference call, the company is focusing on key international sales. Australia, France, and Brazil are new markets that sales teams are working on. There's a large distributor in the UK that's doing well. The company is expecting many more X2 orders to develop internationally, and its confident that sales will continue to reach record levels.

Since the reporting of its quarterly results, the stock has risen 10.6%. In my opinion, the increase should have been around 20%. In my last article, I mentioned that worldwide expansion is important for the company to reach $150 million in annual sales, which would come to about $20 million in earnings. The company should reach that number by 2014. At that point, with a PE of 25, the stock will have a market cap of $500 million, or about double what it has now. With the stock buybacks of about 3 million shares per year, the company will have about 50 million shares outstanding by 2014. By then the stock should be trading at around $10/share in mid-2014.

Key Financials

Gross margin was much better for the latest quarter compared to last year. It grew to 59.4% from 52.8%. The gross margin improvement was from an increase in sales and cost reductions on its Video Segment. This was the highest gross margin for the company in the past eight quarters.

Net margin also increased substantially. It rose to 14.8% this last quarter from 0.1% in quarter 1, 2011. The large net margin this quarter is partially due to a reversal of a litigation judgement of $2.2 million. However, even without that reversal, the company's net margin would be about 7.5%, still the highest in the last eight quarters.

TASER's outstanding shares decreased by 3.1 million since last quarter, from 59.4 million shares in quarter 4, 2011, to 56.3 million shares in quarter 1, 2012. This is the result of the company's aggressive buyback program. The program was completed in quarter 4, 2011, of $32.5 million worth of buybacks, and now the company has started another buyback program this year for $20 million. The company increased it's cash position by $3.3 million over last quarter to $29.7 million. The company has no debt.

The stock buyback program will prevent high volatility and downside risk for the stock. If it goes down too much unnecessarily, then the company will buyback shares to push the price back up.

Trade recommendation: Strong Buy

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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