Gamble of the week: underpriced maker of security equipment
By
Paul Hill Nov 27, 2009
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My preferred approach to playing so-called game-changing new technologies is to wait until the initial hype has died down, and the share prices have fallen. You then pile into these bombed-out stocks while no one else is interested. This way, the upside is potentially enormous, but the risks are limited because the technology has already been tried and tested.
Take Taser International, the American electric stun-gun manufacturer, whose stock is trading near six-year lows. Its weapons are typically used in law enforcement to apprehend violent criminals safely by firing an electric shock that temporarily immobilises them.
These cutting-edge products are patent-protected and have been deployed by police, prison staff and soldiers in the US (82% of revenues) as well as internationally.
In March 2003, tasers helped a Greek special forces team peacefully end the hijacking of a Turkish Airlines A310 at Athens International Airport.
Taser International Inc (Nasdaq: TASR)
The two main advantages of using these devices are that they're a strong deterrent and substantially reduce the number of fatalities in cases where fire-arms would otherwise have been used. In May 2008, then-home secretary Jacqui Smith said: "Taser is making a real difference on our streets, not only keeping the public safe but also protecting police officers." The weapon is not entirely risk-free and does not claim to be, but the number of deaths have been less than 1%.
So why is the company suffering from a depressed valuation? Over the past two years, Taser has ramped up its research and development spending, which has hurt profits, because orders have been deferred until newer versions are released.
However, these next-generation devices are now available, and the group sports a full line of top-notch products with massive potential. Strategically, the firm is also moving away from offering hardware, and instead focusing more on services and recurring revenues, which already account for a fair chunk of the profits through sales of single-shot cartridges.
From here on in, I could see there being a sea-change in performance as customers upgrade to the superior technology – especially if the harsher economic climate triggers civil unrest.
In terms of the numbers, Wall Street expects turnover to rise from $99m in 2009 to $116m in 2010, at which point the group will return to profitability. With such high barriers to entry, I could see Taser achieving turnover and underlying profits of $200m and $40m respectively by 2012.
Assuming a ten-times multiple and after adjusting for the $45m of cash and discounting back at 12%, this produces an intrinsic worth of around $5.80 per share. Better still, the cost savings resulting from a tie-up with a major defence contractor would be immense, so any takeover might elicit a price tag of around $10.
Recommendation: Speculative BUY at $4.36 (market capitalisation $270m)
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