It's only appropriate that Taser (NASDAQ:TASR) kicks off the latest round of Fool Duels. You see, starting in the 18th century, real-life duels could be undertaken with the use of a pistol, or some other form of firearm as time went on. With the advent of the 21st century and the Taser stun gun, it's perhaps only appropriate to declare the winner as the individual who shocked his or her opponent into submission rather than the potentially fatal alternative. For your next duel, I highly recommend that you choose a Taser over a weapon with more lasting ill effects. For your next investment, however, I suggest that you avoid the stock, as Taser has a number of decidedly un-Foolish investment characteristics:
1. Accounting
The latest piece of financial news came out last Friday as the company announced the delay of its first quarter 10-Q SEC filing, shooting the stock down about 7%. The reason given was that Taser used incorrect methods to calculate manufacturing expenses, as well as a clerical error. I don't know about you, but I prefer investing in companies able to file timely financial statements with the SEC. The errors may indeed represent superficial flesh wounds, but they definitely reduce visibility -- at least for the near-term -- and have the potential to balloon into a more serious long-term issue.
2. Lawsuits
Next up is the myriad of product liability lawsuits being filed against Taser. Sure, the most recent lawsuit was dismissed on May 10 and represented the 16th lawsuit dismissed in the company's favor, but overall there are an estimated 50 total cases currently outstanding against Taser. Litigation opens the door to significant potential ramifications with any unfavorable judgments and clearly represents an overhang on the stock -- not to mention a serious drain on cash flow because of lawyer fees, court costs, etc.
3. Miscellany
There are a number of other areas that concern me about Taser. First, the company announced its intent to significantly increase R&D spending to improve existing products, develop new products such as the TaserCam (a minute camera that can be used by law enforcement agencies in the field), and enhance manufacturing efficiency. To me, this represents another drain on shareholder returns and leads me to question the viability of existing products. There have also been past SEC investigations, uneven sales growth (both quarterly and on an annual basis), and questions regarding management's ability to develop Taser into a company capable of churning out consistent sales growth and profitability.
4. Valuation
In terms of valuation, Taser currently trades at about 35 times next year's consensus earnings estimates and has minimal free cash flow. In other words, it appears the market is not appropriately discounting what I believe to be a great amount of uncertainty regarding how successful it will be in the future.
There's no question that Taser's product offering represents a unique, safer alternative to traditional means of law enforcement and subsequent exposure to a very large potential market. However, to use one of Benjamin Graham's many useful maxims to investing, we're looking for investments that first ensure the preservation of capital, and second, provide a reasonable expected investment return. The flip side of that equation is the speculation, akin to heading to Vegas to play slots. Taser lies within the speculative realm of investing. Sure, you could make a lot of money, but there's also significant downside risk, as Taser works through its growing pains.
Much like participating in an actual duel, playing in this space is a high-risk endeavor. Because it's just too difficult to decipher what might lie down the road for Taser. For now, I'd recommend a wait-and-see approach until a track record of more consistent sales and earnings growth is established. But first, let's see what my bullish counterpart Tim Beyers has to say about Taser.
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Think you're done with the Duel? You're not! Go back and read the other three arguments, and then vote for a winner.
Fool contributor Ryan Fuhrmann has no financial interest in any shares mentioned. Feel free to email him with feedback or to discuss the company further.
