Taser stock looks promising

Who says crime doesn't pay? Taser International hopes that it not only pays handsomely but also remains a growth industry. Well, maybe not crime, exactly, but crime fighting.

Taser produces electronic control devices — stun guns, in the vernacular — used by the police and corrections officers, the military and even by crime-wary consumers. Tasers temporarily disable threatening or dangerous individuals or those resisting arrest.

But as much as perps on the mean streets may hate the company's devices, you may love the company's shares. Wall Street analysts certainly do: Most are telling clients to buy the stock (symbol TASR), which at $9 is more than two-thirds off its late-2004 high. Analysts see earnings jumping roughly 50 percent this year and next as Taser penetrates largely untapped markets here and abroad, with essentially no competition.

The Scottsdale, Ariz., company has sold more than 400,000 devices to some 12,000 agencies, primarily U.S. law-enforcement and corrections officers. But that's only 25 percent to 30 percent of the domestic market, and less than 5 percent of the worldwide market. Taser has barely tapped the private-security, military and consumer markets.

Overseas business, which accounted for about 15 percent of 2007 sales, should take on a bigger role this year. So should sales to ordinary Joes and Janes. Taser's C2 model (about $350) began shipping in the third quarter, some in leopard print and fashion pink. The C2 could generate almost 10 percent of company sales this year, up from less than 4 percent in '07, estimates Eric Wold, of San Francisco-based broker Merriman Curhan Ford.

One challenge is to boost profit margins, which have sagged lately. Taser says it has taken an ax to distributor discounts, negotiated price reductions with suppliers and smoothed payroll bumps by cutting overtime.

Despite Taser's potential, it is vulnerable to concerns about safety. Taser says its devices have saved lives by reducing risks to law-enforcement officers and suspects alike. But the devices are clearly controversial, and their use is restricted in some states. The company is no stranger to litigation charging wrongful death or injury, but it hasn't lost a case so far.

Says Taser chairman Tom Smith: "The same batteries that run a digital camera run our Taser. That shows the low power output." Still, an adverse ruling could be devastating.

But the bulls believe patient investors will be rewarded. Considering Taser's growth prospects, says Wold, the stock should trade at 40 to 45 times estimated earnings. Given his profit forecast of 52 cents a share for 2009, he thinks the stock could reach $21 over the next year. Perhaps $17 a share is more realistic — but still stunning.

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Anne Kates Smith is a senior associate editor at Kiplinger's Personal Finance magazine. Send your questions and comments to moneypower@kiplinger.com.