Why Cops Are This Company's Biggest Customers

Federal budget cuts are hitting the government agencies hard, including law enforcement agencies.  As a result, they are actively seeking ways to minimize costs associated with citizen complaints and litigation. TASER (NASDAQ: TASR  ) , the market leader in conducted electrical weapons, should benefit from this trend. Its non-lethal weapons and on-officer video solutions help protect police and sherriff's departments against such risks.

Reducing casualties minimizes bad press and citizen complaints
Law enforcement agencies spend an estimated $2.5 billion every year to settle complaints against them, which works out to around $2,500 per officer. The image of law enforcement agencies also suffers each time an officer or a suspect gets injured or dies. To maintain the professionalism and public perception of law enforcement agencies, cops and deputies need to reduce the number of injuries and casualties on their watch.

One possible solution is the increased adoption of TASER's non-lethal weapons, which make death or serious injury far less likely than firearms do. Research from the Police Executive Research Forum in September 2009 found that the use of TASER's weapons cut officer injuries and suspect injuries by 76% and 40%, respectively.

The truth saves you a lot of trouble -- if you can prove it
In addition to minimizing officer and suspect casualties with non-lethal weapons, accurate evidence recording and management is vital in avoiding citizen complaints and litigation. Body-worn cameras protect officers against false accusations and provide concrete trial evidence, all at relatively affordable prices. TASER's body-worn cameras cost a few hundred bucks each, and the cheapest subscription plan for its digital evidence data management online platform is priced at less than $10 per month.

In contrast to the relatively low cost of on officer video solutions, the evidence on their benefits is compelling. The Rialto, Calif., Police Department reported a 87.5 % reduction in complaints and a 59% reduction in use of force following the adoption of TASER's video solutions.

Other law enforcement professionals seem to agree with this conclusion. According to a survey of close to 800 law enforcement professionals, 86.4% of them agreed that body-worn cameras reduce false claims and litigation. More importantly, TASER's branding and market positioning resonates well with its customers; 40% of the survey respondents recognized it as the market leader in body-worn cameras.

The results speak for themselves. TASER saw its Q3 2013 bookings for its on-officer video solutions quadruple from $1.3 million a year ago to $5.8 million in the current quarter.

The law enforcement market
As mentioned above, selling to law enforcement agencies suffering from budget cuts is not an issue, as long as you can provide value. As a result, TASER sell most of its products to law enforcement agencies, with consumers accounting for only 4% of its fiscal 2013 sales.  On the other hand, TASER's firearms peers Sturm, Ruger & Company (NYSE: RGR  ) and Smith & Wesson (NASDAQ: SWHC  ) are primarily consumer-focused. In fact, consumers accounted for close to 90% of Smith & Wesson's fiscal 2013 revenues, while Sturm, Ruger & Company does not disclose the exact proportion of consumer sales. However, both weapon manufacturers have vastly different views of the profit potential of the law enforcement market.

Smith & Wesson is keen on the law enforcement market and has made efforts to drive more business in this area. In August 2013, it announced that it was awarded a firearms contract from the Los Angeles County Sheriff's Department (LASD), the second-largest local policing agency in the U.S. The LASD includes 13,000 duty personnel who are issued duty handguns, and it will be using the new Smith & Wesson M&P9 pistols as part of the five-year contract.

Earlier in May 2013, the San Antonio Police Department also elected to upgrade its existing firearms to the new M&P40 pistols from Smith & Wesson.

All these are signs pointing to the increased popularity of Smith & Wesson M&P pistol series with law enforcers. However, under the current backdrop of budget cuts, pistols and other forms of lethal weapons don't help law enforcers save costs the way TASER's non-lethal weapons do.

In contrast to Smith & Wesson's optimism, Sturm, Ruger & Company is negative on the law enforcement market. At an analyst conference call in April 2013, CEO Michael Fifer called the law enforcement market "terrible."  He claimed that law enforcement agencies are cash-strapped because of budget cuts, and thinks that selling weapons to these customers is not profitable.

I beg to differ. Budget cuts simply mean that spending shifts to where it will matter most. According to TASER, an average of $10 billion-$20 billion is spent every year on law enforcement technology. On the issue of profitability, TASER has consistently delivered gross margins double that of its peers Sturm, Ruger & Company and Smith & Wesson.

Conclusion
Non-lethal weapons and on-officer video solutions are increasingly in demand with law enforcers, and most of them are buying these products from TASER because of its superior branding. In contrast, its peers are either giving the law enforcement market a miss, or not contributing to cost savings like TASER's products do. Going forward, I am positive that TASER, currently averaging about $100 million in revenues, should take a bigger bite of the $10 billion-$20 billion annual law enforcement technology spend.

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