Is Taser (Nasdaq: TASR ) the new Altria (NYSE: MO ) ? I ask because it seems like every day a new lawsuit is filed against the stun-gun maker.
Take last Friday, for instance. Hours after I filed one story reporting that a wrongful death suit had been dismissed in a California court, another was filed in Fort Worth, TX. The complaint comes from the family of a Midland, TX, man who died after he was shot multiple times with tasers when police tried to arrest him for trespassing.
I don't know the merits (or lack thereof) of the case, so I won't go into details. But I will say that this appears to be at least the 21st suit against the company for everything from wrongful death and training injuries to injuries earned during an arrest. That's a massive potential liability, right? Well, let's have a look.
$10 million for a $21 million problem?
A quick review of recently publicized wrongful death settlements suggests that most run into the hundreds of thousands, and many go $1 million or more. If all the cases against Taser were to be settled for $1 million, that's $21 million in cold, hard moola. Ouch, right?
Maybe. According to its recently filed 10-Q, the stun-gun maker's insurance coverage ranges from $5-$10 million on deductibles from $10,000-$250,000. Doug Klint, vice president and general counsel for Taser, says this coverage is comprehensive. Let's assume, then, that the company could painlessly absorb as much as $10 million in damages.
The sweet sound of an "o-fer"
Sounds good so far, right? There's just one problem: We can't know how much Taser would be liable for if it lost the cases it's involved in. Klint says that's because Taser's accounting standards require potential damages to be both "probable and estimatable" before the company will charge a reserve to its balance sheet. Yet management would only know that if a settlement offer were drawn up or a judgment were to be handed down.
Neither has happened, so legal risk isn't reflected in Taser's financials.
But we as investors can't accept that. Instead, we've got to estimate the chance that Taser will suffer a crippling legal decision. Doing so will help us understand what our risk of total loss is and, therefore, what we ought to demand in potential returns. Let's start by reviewing what's happened so far: Taser is pitching a shutout in the court room. That's right -- opponents have won exactly nothing.
Also, recent cases involving local law enforcements using tasers have been settled for far less than $1 million, and sometimes dramatically so. For example, a Hollywood, FL, family agreed to take $6,000 in April from the city. Other recent settlements in Seattle, WA (for $25,000), and Portland, OR ($145,000), didn't involve any deaths and, therefore, aren't likely to be a barometer for what could be. Another case in Indiana was settled for $500,000 with county officials, but the suit against Taser remains in discovery.
The stunning bottom line
All this spells pretty good news for the stun-gun maker. Negative publicity aside, it has never been held liable in a wrongful death suit. And management says it intends never to settle such claims. That means any major damage would have to come from an outright court victory. But the chance of that happening, in my opinion, seems remote -- because Taser has already successfully defended itself in court.
Yeah, I realize this is only a guess. But sometimes in investing -- especially the Rule Breaking kind -- you've got to do just that, and then demand enough of a reward to compensate for the risk.
How much upside is enough as far as Taser is concerned? Between legal hassles and financial risk, I'd demand a triple in three to five years. Is that possible? You'll just have to wait and see, because that's the subject of next week's follow-up.
In the meantime, I want to hear from you. What do you think? Is Taser really worth the risk? I'll publish the best of your responses in my final analysis.
For more shocking Foolishness:
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Fool contributor Tim Beyers wonders whether Taser has more lawyers than design engineers. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what's in Tim's portfolio by checking his Fool profile here. The Motley Fool has an ironclad disclosure policy.