TASER (Nasdaq: TASR) went back to the future yesterday. News that the stun-gun specialist had landed one of its biggest sales yet sparked an 11% rise in the stock -- but the electricity of the news soon drained, leaving TASER up only 6% by close of trading.
Remember when...
Once upon a time, this two-time Motley Fool Rule Breakers pick was the ultimate momentum stock, grouped by friend-of-the-Fool Whitney Tilson with firms like Travelzoo (Nasdaq: TZOO), Research In Motion (Nasdaq: RIMM), and Broadcom (Nasdaq: BRCM) as examples of companies whose stock prices had become divorced from any relation to their profitability. Trading around $30 back in 2004, TASER's stock proceeded to lose more than two-thirds of its value when mo-mo trader sentiment turned against it. What had gone up ... inevitably turned back down.
What we know
But judging from investors' reaction to TASER's news yesterday, it seems happy days are here again. On Monday, TASER announced "a significant order from the interior ministry of a foreign country," which has agreed to buy 3,000 M26 stun-guns plus "related accessories" from the firm, due to be shipped in Q1 2008. Speaking on CNBC after the news broke, TASER co-founder Tom Smith (no relation) declined to give much more detail about the order than what the press release contained. He did tell us that this deal was orders of magnitude greater than the run-of-the-mill requests TASER gets from new customers, which usually total 10 or 20 guns, valued at perhaps $10,000 to $20,000 in all.
Assuming that's true, I certainly see why a 3,000-unit order might set some investors' pacemakers racing. Based on the prices quoted on the Internet, it seems that the M26 sells for roughly $400 a pop. (The "related accessories" part of the order should bump that up a bit, while volume discounts will probably knock it back down.) By my best guess, we're looking at about a $1.2 million sale here.
Return to mo-mo?
Now, don't get me wrong -- $1.2 mil is a heckuva lot better than $10,000. But before they get too excited over the news, Foolish investors (might want to take a second look at these numbers:
- Value of the contract: $1.2 million.
- TASER's price-to-sales ratio before the price jump: 7.8. That's several times the multiple given more traditional arms-makers like Smith & Wesson (Nasdaq: SWHC) or Sturm, Ruger (NYSE: RGR).
- Increase in TASER's market cap in response on the contract: $43 million.
Now, I'm no Ph.D. in mathematics, but it seems to me that yesterday's news was a bit overdone. At most, I see TASER increasing in value by about $9.4 million (the sale price times the sales multiple), based on yesterday's news. But $43 million? That's momentum speaking, people. It's got no basis in logic.
And I do mean "at most"
In fact, the way I read the press release, even a $9.4 million increase in market cap would be overgenerous. Beyond investors' unusually strong reaction, the sale itself smells a little funny to me. Read the press release closely, and you'll notice that the stun-guns being sold aren't TASER's signature X26 model -- the gun mentioned in pretty much every other sales announcement TASER has released over the past year -- but rather the M26.
What's the diff?
The difference is that TASER's M26 is last century's technology. Literally. The gun was first introduced in 1999. In fact, if you visit TASER's website, you'll find that the company mainly uses the M26 as a stalking horse for talking up the X26, which TASER describes as: "60% smaller & lighter than [the] TASER M26" and featuring "even greater stopping capability" than its predecessor.
So why would TASER's mysterious foreign customer buy up 3,000 old M26s, rather than the new-and-improved X26 variant? I've got two theories:
- TASER is unloading obsolete inventory, perhaps in anticipation of closing out the M26 line.
- The foreign customer couldn't afford the top-of-the-line X26, and so bought the much cheaper, but bulkier and heavier, M26 instead.
Again, don't get me wrong -- a sale's a sale, and $1.2 million is a material deal for TASER, amounting to about 1.3% of its annual revenue. Still, neither of the above scenarios -- sweeping out old inventory, or selling to a cash-strapped customer -- suggests that yesterday's sale was particularly profitable for TASER. If that's the case, the additional revenue should probably have been valued at less than TASER's usual 7.8 multiple to sales.
Foolish takeaway
No matter how you slice it, TASER didn't deserve the price bump it received yesterday. This was a case of momentum traders paying through the nose for overblown news.
