Today I've been tapped to make the bearish case on Motley Fool Rule Breakers recommendation Taser International
Well, the odds may be stacked against me, but fortunately for my side of today's argument, we do have some real ammunition to shoot with. Let's start with a simple P/E valuation ...
... now let's stop.
Before we've even begun our valuation of Taser, we're stumped by the fact that, over the last 12 months, Taser hasn't earned a profit. On the contrary, it's currently losing $0.10 for every dollar of sales it makes. Admittedly, the analysts who follow Taser predict it will turn a tidy profit next year, and one sufficient to give it a forward P/E ratio of 29. However, given that these same analysts have managed to overestimate the company's profits in three of the last four quarters, I hesitate to take their predictions at face value.
Try again
Now, I suspect that my esteemed opponent in this duel, Tim Beyers, will argue that we should do just that. If we do (he'll insist), then the firm's forward P/E ratio of 29 will look more reasonable, given that these same analysts predict Taser will grow its profits at 32% per annum.
Here's the problem, though: To accurately predict where a company is going, you need to have at least some kind of consistent track record on where the company has come from. And that's something that Taser lacks. Consider its record over the past five years, for example:
|
2001 |
2002 |
2003 |
2004 |
2005 |
Last 12 Months |
|
|---|---|---|---|---|---|---|
|
Return on Capital |
14.9% |
3.4% |
27.7% |
29.9% |
1.0% |
5.2% |
|
Return on Equity |
53.9% |
3.6% |
26.6% |
29.7% |
1.0% |
(6.2%) |
|
Gross Margins |
57.5% |
56.2% |
61.6% |
66.8% |
63.3% |
65.1% |
|
Operating Margins |
11.3% |
3.7% |
31.0% |
45.1% |
3.3% |
13.7% |
|
Year-Over-Year Sales Growth |
100.8% |
43.6% |
148.5% |
176.6% |
(29.5%) |
12.4% |
Stare at the data as long as you want. I dare you to discern a pattern in it. Returns on capital and equity, margins, sales growth -- there's no clear trend to the upside or downside. It's a roller coaster throughout. It strains credulity to argue that the analysts can accurately turn these kinds of numbers into a hard and fast assertion. 32% profit growth per year over the next five years? I just don't buy it.
Try again, again
Fortunately, even absent profits, or reliable predictions thereof, we have other metrics available to value the company. Sales, for example. Although Taser may not be earning a profit on them, at least it is making a few sales -- $61 million in the last 12 months, in fact. So let's see how Taser stacks up valuation-wise against a couple of the gunsmiths.
|
TTM Sales |
Price-to-Sales |
Profit Margin |
Market Cap |
|
|---|---|---|---|---|
|
Sturm, Ruger |
$165 million |
1.4 |
1.2% |
$234 million |
|
Smith & Wesson |
$191 million |
2.4 |
6% |
$464 million |
|
Taser |
$61 million |
7.9 |
(10.2%) |
$485 million |
Why compare Taser to Ruger and S&W? Because they're the closest things I can find to real companies competing in a market analogous to Taser's. (He said, with apologies to backers of Law Enforcement Associates
Although the comparisons aren't perfect, I'd still argue that the numbers suggest that Taser is overvalued. With sales one-third the size of S&W's, Taser sports a higher market cap. With sales less than half those of Ruger's, Taser gets a sales multiple more than five times as large. What's more, both of those companies are profitable, and Taser is not.
Listen, I like rayguns (or reasonable facsimiles thereof) as much as the next guy. But overpriced is overpriced. And the numbers I'm looking at tell me Taser is overpriced.
The Duel's not done yet! Go back and read the other arguments, make your own case in Motley Fool CAPS, then vote for the winner.
Fool contributor Rich Smith has no position, short or long, in any company named above. The Motley Fool has a disclosure policy.
