What to Make of Taser?

Dow Jones' (NYSE: DJ  ) weekly Barron's took another shot at non-lethal weapon manufacturer Taser (Nasdaq: TASR  ) this weekend. The company fired back with a press release of its own.

A Foolish look at Taser should make you wary. At its peak two weeks ago, the company's market capitalization was $1.8 billion. It's now much nearer to half that. But with trailing revenues at around $34 million, the stock still trades at an electrifying 36 times sales.

The company's defense is that its market penetration is low at 6.2% of police and corrections officers in the U.S. -- and the international market is 10 times the size. Add in the military, private security forces, and the ultimate prize -- the civilian self-defense market -- and you have a gigantic pool that is largely untapped.

If every U.S. officer were equipped, Barron's estimates sales would be around $800 million, compared to today's market capitalization of $886 million. But when you consider Taser's profit margins at 27% far exceed those at lethal weapons competitors Smith & Wesson (AMEX: SWB  ) and Sturm, Ruger (NYSE: RGR  ) , you start to grasp what leverages the stock.

And remember, Taser also sells "cartridges" -- the Taser equivalent to ammo. Ideally, that's a similar business model to Gillette (NYSE: G  ) selling high-margin razor blades. Of course, you have to have significantly more guns in the field before these repeat sales become meaningful.

The U.S. military has 1.4 million troops on active duty -- which is a market roughly 30% larger than domestic law enforcement. Add in Reserves and Guard and you get another 1.2 million. It is a market with the potential for very large orders.

Then there are 117 million American households. The company is introducing a new product for this market -- one it shifted away from in 2000 to focus on law enforcement. This is the holy grail of potential, but sales, not potential, provide long-term value.

There are potential problems with Taser as well. Orders grew by 13% in the latest quarter, but that hardly justifies a stock trading at 60 times 2004 projected earnings. Currently, Taser faces no real competition. What will profit margins be when competition arrives?

There is also the issue raised by Viacom's (NYSE: VIA  ) CBS on 60 Minutes about the weapon not being non-lethal to everyone. Although the company is quick to provide hard data supporting the product's safety, doubt remains about what impact lawsuits for wrongful death cases could have on long-term profit margins.

It's only natural to be wary of a stock that is up 25-fold in a year. Then again, while it might seem a stretch, Dell Computer (Nasdaq: DELL  ) was once like Taser, a company offering something unique to a huge potential market. Taser looks positioned to essentially monopolize this market for the foreseeable future.

Sometimes rich Taser is. But, is it grossly overpriced?

If it weren't for its high valuation, Taser might have the one-two punch Tom Gardner'sMotley Fool Hidden Gemsnewsletter looks to exploit. Take a 30-day free trial and uncover values that have yet to appear on Wall Street's radar.

Fool contributorW.D. Crottydoes not own stock in any companies mentioned.

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