Last week, TASER International (AXON 0.66%) shares took a tumble on reports that the Los Angeles Police Department could delay or cancel plans to issue all its officers new TASER AXON police body cameras. Falling 5% in the immediate aftermath of the news breaking, TASER shares have failed to bounce back over the intervening week.
Which raises the question: Is this risk really as serious as it seems? Or is it still a buying opportunity?
A very big deal
TASER's L.A. contract, believed to involve 7,000 Axon cameras and TASER stun guns (and curiously, according to ABC News, also a "cell phone" for each officer), is valued at $57.6 million over five years. City council members, however, expressed "sticker shock" at the price, and are considering rebidding the contract in hopes of attracting a better offer -- perhaps from a rival such as Digital Ally or privately held Vievu.
That could be bad news for TASER, as the L.A. contract is said to be the largest it has ever won. Albeit it is spread over five years' time, $56.7 million is more revenue than TASER collected in Q4 of 2015, according to data from S&P Global Market Intelligence -- the company's most lucrative quarter ever.
...or just not that big a deal?
Sensing the prospect of losing all that business, TASER shareholders are understandably upset. And yet, according to ABC News, they may be worrying over nothing at all. L.A. City Councilman Mitch Englander, who has suggested rebidding the TASER contract, has so far held off on actually getting that ball rolling, says that, in ABC's words, "the political will may already be shifting in favor of the contract" [emphasis added].
Mayor Eric Garcetti, meanwhile, says he's confident that the contract was awarded the first time. Noting that a rebid could delay deployment of the body cameras by as much as another year, he's pushing to move the contract forward despite reservations on the council.
All of which suggests that a rebid, while a previously unforeseen risk, may not actually materialize -- and TASER's contract may in fact be safe.
Checking the price tag... on the stock
So what if the contract does move ahead? Well, in that case, TASER's shares declined 5% for no good reason -- and they're still 5% cheaper today. But is that cheap enough?
Priced at 50 times earnings and paying no dividend, TASER shares already look overpriced for the 30% long-term growth rate that analysts have assigned to the stock. Subtract the value of the L.A. contract -- say, $1.2 million a year, figuring $57.6 million spread over five years, at about a 10% profit margin -- and TASER would become 6% more expensive than even that.
On the other hand, S&P Global data show that over the past 12 months, TASER generated in excess of $40 million in positive free cash flow -- more than twice its reported $19.9 million in GAAP earnings. Valued on free cash flow, the stock sells for closer to 24 times free cash flow -- and as little as 21 times FCF once you back out the value of its cash reserves.
That actually sounds pretty attractive in light of the 30% projected growth rate -- if TASER can achieve it. Last quarter, they didn't achieve it. Earnings growth was less than 1%. When you get right down to it, therefore, I think that's the real issue with TASER shares: not the risk of losing one contract, but the failure to keep adding new contracts fast enough to support 30% growth.