TASER International (NASDAQ:AXON) saw a significant drop last Monday, after the release of two news stories that aren't looking so good for the company.
In this episode of Industry Focus: Energy, Sean O'Reilly and Taylor Muckerman talk about what happened earlier this month between Taser, the Supreme Court, and the NYPD; why these stories have resulted such a stark sell-off; and how the company's valuation looks today in context of this dip -- and the potential it has in the coming years and decades.
Also, the hosts take a look at Tesla Motors' (NASDAQ:TSLA) Q3 car production numbers, a big new oil draw announced by the American Petroleum Institute, and why Marathon Oil (NYSE:MRO) is showing up on our radars this week.
A full transcript follows the video.
This podcast was recorded on Oct. 6, 2016.
Sean O'Reilly: Welcome to Industry Focus, the podcast the dives into a different sector of the stock market every day. Today is Thursday, October 6th, 2016, so we're talking about energy, materials, and industrials. I'm joined in studio by The Motley Fool's Taylor Muckerman. Happy October, how are you?
Taylor Muckerman: It doesn't own me.
O'Reilly: You don't own me, October! I like November better.
Muckerman: I like July, August, and September better. But whatever.
O'Reilly: So you're really sad that September is gone.
Muckerman: It feels good, but yeah.
O'Reilly: I run regularly here in Alexandria, and it's been really nice lately.
Muckerman: I'm sure it has been.
O'Reilly: So, a lot to cover today. Very briefly, before we get going, I did want to at least mention Tesla's recent announcement that they're actually hitting their stride, finally, on car deliveries.
Muckerman: That's what they say.
O'Reilly: What does that mean? [laughs] You're so mean to these people!
Muckerman: I'm a shareholder, so I want to see the November 1st financial statement released. Then I'll be impressed, hopefully.
O'Reilly: They've been trying to make them look good, right?
Muckerman: Yeah. They delivered 24,500 cars, then there's 5,000 in transit that will be counted in Q4. But, they're still shy of their weekly production goals that they said they were going to shoot for in Q3 and Q4. They wanted to produce 2,200 vehicles per week, and they only produced around 1,900 for the third quarter. So, they have some work to do to get to 2,400 a week, which is what they wanted for the fourth quarter. But, they did deliver a 70% increase year over year, and they stemmed, the previous two quarters, sequentially, were down. So, the first quarter was down from the fourth quarter of year, second quarter down from the first quarter. They reversed that course, which was nice to see. But yeah, the work is still to be done to reach full-year numbers.
O'Reilly: Dun dun dun. They reiterated, though, which is nice.
Muckerman: Yeah, they say that the fourth quarter should have more production than the third, which it would need to if they want to hit that 50,000 car mark for the second half.
O'Reilly: Cool. We'll have to do a whole show with that one.
Muckerman: Yeah, we shall see if all this production turned into some kind of economies of scale. And if you look at it, you had 15,800 Model S cars, and 8,700 Model X cars.
O'Reilly: Dun dun dun. I want to test-drive a 3. Anyway. Moving on. As our listeners have probably noticed by now, we usually talk about oil and gas, partially because the stories over there have been so crazy in the last year or two. We talk about a little bit of Tesla, a little bit of cars, blah blah blah.
Muckerman: Solar every now and then.
O'Reilly: But, another company that has an interesting story going on right now -- that also happens to fall under our energy, materials, and industrials brand -- is Taser.
Muckerman: I was surprised by this.
O'Reilly: [sighs] Do you want to have this debate?
Muckerman: No, not anymore. I'm over it.
O'Reilly: [laughs] Taser International, just accept it.
Muckerman: Yeah, Taser International.
O'Reilly: Accept Taser, Taylor.
Muckerman: Sharks with laser beams attached to their heads.
O'Reilly: [laughs] Oh my god...you know what's funny? I literally just watched the first Austin Powers this weekend.
Muckerman: A classic. For the first time?
O'Reilly: No, it's been like 10 years since I've seen it. It is such a great spoof of the early Bond films.
Muckerman: It's a gem.
O'Reilly: I don't know why they didn't just keep rolling with that, because there's so much...anyway. Taser's stock fell 15%-20%.
Muckerman: It was down pretty significantly.
O'Reilly: It was not good. News, this was actually for two reasons, from what I could gather. The first was a private law enforcement equipment firm Vievu -- am I pronouncing that right?
Muckerman: I'd pronounce it that way, sure.
O'Reilly: Vievu, if I'm pronouncing your name wrong, feel free to call, and, I'm sorry. They beat out Taser for a contract with the New York Police Department to provide more than 1,000 body cameras and unlimited cloud-based video storage. This was a big deal. It's the New York Police Department. Taser is the unchallenged leader in the sector -- they have 75%-80%. This is a big deal. After that, shares fell more than 15%. Taser actually put out a statement on this loss on their website. It's crazy. It's kind of unusual. They have tons of contracts. If you lose one contract, you put out a statement? I thought it was odd.
Muckerman: It is the growth side of their business. Tasers, the actual Taser guns, is where they got their "in" with police departments. That relationship has enabled them--
O'Reilly: It's blossomed.
Muckerman: --to buddy up on the body camera market, as well. Some people question the back-room dealings of how they got some of these contracts to become the 80% market share leader.
O'Reilly: Are you suggesting anything?
Muckerman: There's a New York Times article that I think you sent me that said that police chiefs have gone on to work for Taser after contracts had been accepted, there's been--
O'Reilly: Goldman Sachs peeps go work for the government! [laughs]
Muckerman: There have been bids that weren't necessarily made public, it was just, "Hey, Taser bid on this--"
O'Reilly: What's interesting about Vievu -- they're private, so we don't know for sure, but most people are like, "These people aren't going to make any money at these prices."
Muckerman: Yeah. Well, you have to get in there somehow, right? Still, 1,000 cameras is less than 3% of the total New York City Police force. So, it's not a huge deal--
O'Reilly: It's symbolic.
Muckerman: --for U.S. police departments. It is symbolic. And if it does work out well, there's been some chatter that maybe the demand is so high for Taser cameras that they might not be able to keep up with it, so maybe a secondary or tertiary supplier is needed.
O'Reilly: Yeah, tons of data on that. Really quickly, you can read this whole thing on Taser.com: "While we respect the decision of NYPD's RFP committee, we feel this decision was a result of a competitor offering their products mirror or below costs. Our solutions have an established market value, have been proven by 34 Major Cities on the Axon Network," which is their camera brand, "Our product suite is better than ever, and our company is well-positioned to compete in all future Major City procurements. While we never want to lose a large deal, we are committed to doing right by our shareholders as well as our existing customers and are confident in the value of our solution." Says a lot, but not a lot.
Muckerman: Yeah. It's something I feel like they might have to say. But when you look at how they started in some cities, 1,000 or 2,000 cameras at a time is how they got their foot in the door. So this could be somewhat concerning.
O'Reilly: I'm interested to get your thoughts on this. This actually seemed worse, and nobody's really meant. This is the second reason that Taser is having a rough time lately. The Supreme Court recently rejected a bid to open a case concerning what is still Taser's key business, which is Tasers. That's still the majority of their revenue. Basically, somebody died, wrongful death, and the Supreme Court just refused to reopen the case because they're like, "Yeah, this is use of force, and that's bad."
Muckerman: Excessive use of force. There was a mentally ill person that was not being very.7..
O'Reilly: Cooperative, we'll say.
Muckerman: Yeah, kind of bear hugging a telephone pole or something like that. They Tased him to get him to release it, and he died shortly thereafter. So, while the cops weren't charged, there was a precedent set that this was excessive force. But, it's the operator's usage of this product.
O'Reilly: It's like a gun. Guns don't kill people, people kill people.
Muckerman: With guns.
Muckerman: Maybe it's not the gun that come under fire.
O'Reilly: It was interesting. I actually popped on over to the SEC website, your friend and mine.
Muckerman: Look at you, using your resources.
O'Reilly: Well, I have a web browser. This definitely seemed like it wasn't the only incidence of this happening. If you look at their latest 10-Q, there are multiple pending lawsuits against the company for things like wrongful death. There's like 8 or 9 of them on this filing.
Muckerman: Have you ever seen someone get Tased?
O'Reilly: It's not pretty.
Muckerman: Pretty much. I mean, it was kind of fun to watch, but in a weird, sick way.
O'Reilly: That's pretty dark, man. [laughs]
Muckerman: Well, I was walking the other direction at night--
O'Reilly: Woah, you saw this in person?!
Muckerman: Oh, yeah. I've seen two or three people get Tased in person.
O'Reilly: Where do you live?
Muckerman: This was in Wilmington in college in North Carolina, outside of the bar. People get unruly, man. They have to be put down.
Muckerman: Whether or not it was legit or not...the flashes shone in the trees that were lining the street, turn around and there was a guy in the middle up the street just laid out.
O'Reilly: Wow. So, yeah, excessive use of force. But it does come down to, in your opinion--
Muckerman: I mean, it does kind of tarnish the brand. But the gun did not misfire. But, if you look at this company, the shares have done pretty well.
O'Reilly: Yeah. This is going to be a segue into the valuation, which we really need to talk about. These two news events, basically, the bottom line is, where does this leave Taser's business today? They have the two businesses, the weapons segment and the Axon segment. The Axon segment includes not only the cameras, but the unlimited video data storage, which is under evidence.com.
Muckerman: Supposedly, the U.S. police departments combined have more Taser video footage than all of Netflix videos available today.
O'Reilly: Yeah. The evidence.com is important because, having it separate from a police department eliminates any possibility of any kind of tampering under any circumstances. That is what the public wants. It's probably in society's best interests.
Muckerman: Unless one of those police chiefs--
O'Reilly: I swear... [laughs]
Muckerman: [laughs] I'm just throwing that out there.
O'Reilly: All right, ladies and gentlemen, you guessed it, Taylor Muckerman does have a tinfoil hat on his head right now. It's there. I'm kidding.
Muckerman: We're not video taping today, so there's no proof.
O'Reilly: So you can wear the tinfoil hat. [laughs] So, first six months of this year, net sales for the company came in at $114 million, up 25% from last year.
Muckerman: Nice, I'll take that.
O'Reilly: Pretty good, right? Taser segment revenues were $91.3 million. So, obviously far and away, that's 80% of their business. Up 20% from last year. Axon revenues, $22.9 million, up 50% year over year for the first six months out of 2016.
O'Reilly: That is beautiful.
Muckerman: Yeah. That's why the stock sold off 20%, because their growth unit is possibly experiencing some head winds.
O'Reilly: "Threatened" is the word.
Muckerman: When you look at it, what are the barriers to entry? Cameras are so small, and they're so durable these days. Look at Snapchat, they're coming out with their own eyeglasses with a camera in it.
O'Reilly: That's so weird to me! Remember how Google Glass failed? It was like, "Are you recording me when I'm talking to you?"
Muckerman: Yeah, they framed it differently. They framed it as something the user could use. Snapchat, they're presenting it as, being able to show people rather than to record people. It's just the way they're framing it. Anyway.
O'Reilly: I'm going to put on my tinfoil hat now, I'm suspicious.
Muckerman: Cameras can be put in anything, any time. They're very cheap these days.
O'Reilly: Yeah. The other thing is, they're starting to put them on police cruisers. The story's still there, I think, and I'll say why in a minute. But, you can imagine this evidence.com stuff, all this data, all of the sudden, the only parallel I can think of, and it might not be the best, is something like a YouTube or Netflix. They just have all this stuff, and people are giving them $10 a month to have a subscription. So, you can imagine, if they get in on the majority of police departments, which, they have so far -- market penetration isn't that high -- this could be a serious cash cow in 10 years.
Muckerman: Yeah. You have this renewing revenue, depending on the ownership rights of the video footage. If Taser owns it, then yeah, these police departments are going to have to continue to pay storage fees. I don't think you can just delete evidence.
O'Reilly: [laughs] Unless you're one of these cops -- no, no.
Muckerman: So, what's your thoughts, long term?
O'Reilly: This thing is still pricey to me. Even after this drop, it's still at 100 times forward earnings, give or take.
O'Reilly: Anybody that's thinking about taking their toe in the water, here, needs to be fully aware that this is the quintessential growth stock. They're not losing money, so it's not that bad.
Muckerman: Yeah, you hope it's the quintessential growth stock, with that valuation.
O'Reilly: That being said, and with this caveat, I just want to throw out there that the broad trends underlying the reason for Taser's valuation are still intact. According to the Major City's Chief's Police Association--
Muckerman: Say that eight times fast.
O'Reilly: I actually can't. MCCPA -- that's not any better. But, 42 of 68 Major City police departments make use of body cameras. However, this doesn't mean cameras on every officer. This ignores everywhere else in the United States. This is a big country.
Muckerman: Yeah, it's a blue ocean out there, especially with more and more police brutality possibilities.
O'Reilly: Bottom line, to all our officers of service who are listening, we appreciate everything you do. You keep us safe, what you do is vital to society. But this trend of wanting body cameras on stuff, I cannot see it stopping.
Muckerman: No. Apparently originally, police officers were a little bit wary of it. But now--
O'Reilly: It's in their interest, too. Everybody has the facts. Because, they're probably doing the right thing.
Muckerman: Generally. That's what you would hope, right?
O'Reilly: So, bottom line, it's very hard to believe that in 10-20 years from now, we won't have a lot more cameras.
Muckerman: I agree. The cameras will be there. Just depends on whose they are. And, another point to make is, their Axon camera line is using Ambarella chips. If you want to maybe, little aside there. Maybe, if you're an Ambarella shareholder, you might not realize that. That's something to keep an eye on.
O'Reilly: Cool. Pivoting back to our typical topic, which is oil.
Muckerman: Lay it on me.
O'Reilly: Another surprising oil draw was announced last night by the American Petroleum Institute. It was more or less confirmed this morning by the Energy Information Administration.
Muckerman: They released that at 10:30.
O'Reilly: API showed a 7 million barrel draw in U.S. oil inventories. EIA, this morning, said it was actually 3. But, they were projecting a 2.5 million barrel build. This has been going on for a little bit more than a month. Has supply and demand balanced?
Muckerman: There was a big supply disruption at the beginning of September on the East Coast with weather-related issues. That hampered it a little bit. On Labor Day weekend, a hurricane rolled through. I was in New Jersey, which is a big hub for refiners and oil stockpiles. Activity was a little bit less than what it typically is. So, that kind of kick-started this inventory drawdown. West Coast terminals are still seeing inventories rise, or at least stay flat. So, the East Coast is the main driver of this. But, it's odd, because at this time of year, you usually see refineries shutter in some production and start working on maintenance and repairs.
O'Reilly: And they're not buying crude.
Muckerman: Summer season is still busy. But, it appears that that's not necessarily the case yet. So maybe that takes place a couple weeks later than normal. Last week or the week before, we talked about gasoline demand. So, maybe these refineries feel like they need to work a little bit extra this refining season. But then again, you see imports are down into the U.S. That kind of hints that maybe global supply is still pretty high. So, the U.S. is producing its own oil now, we're importing less and less, and things like that. So, I don't necessarily think this hints at anything other than, maybe, refiners having higher demand. And we witnessed that in the gasoline data from last week.
O'Reilly: Cool. Before we head out, I wanted to get your thoughts on any stocks that you find interesting these days.
Muckerman: Quick hitter, Marathon Oil. It's a company that has been on a tear recently.
O'Reilly: That's my favorite gas station.
Muckerman: About a double since late February. They made a recent purchase in Oklahoma's STACK formation. They're hoping to drill anywhere from 8 to 10 wells this coming quarter.
O'Reilly: That's part of the Permian.
Muckerman: Yes. It's one of the more highly touted areas in the Permian. Pristine balance sheet, when you look at oil companies, producers in particular. They're only 38% debt to equity.
O'Reilly: Oh, wow.
Muckerman: Strong current ratio. So they're liquid, and they're solvent. So they can keep producing. If you want a levered play to oil prices, Marathon Oil could be it.
O'Reilly: Cool. Alright, Mr. Muckerman, thanks for your time.
Muckerman: Thank you.
O'Reilly: Have a good rest of your week.
Muckerman: You too.
O'Reilly: That's it for us, folks. We'd like to give a special shout-out to our producer, Austin Morgan. Thanks, Austin. If you're a loyal listener and have questions or comments, we would love to hear from you. Just email us at firstname.lastname@example.org. Once again, that's email@example.com.
As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear during this program. For Taylor Muckerman, I am Sean O'Reilly, thanks for listening, and Fool on!