Taser stock price may turn on police body camera business

By Lewis Krauskopf

(Reuters) - Concerns about higher spending and increasing competition have felled the once high-flying shares of electrical weapons maker Taser International Inc (NASDAQ: TASR).

Now the small-cap company, whose stock price has been nearly halved since the summer, must prove that investments are paying off for its newer product line: wearable body camera systems for law enforcement agencies.

Taser is a leading provider of the cameras themselves as well as a service to collect and share digital evidence, which analysts say is more lucrative than the hardware because it carries higher margins with recurring revenue.

Two tests loom in the next few months, when police departments in London and New York City are expected to announce contracts for body cameras.

Taser shares had fallen from a record high of $35.95 in June to below $17 on Tuesday. They spiked about $2 on Wednesday after Ladenburg Thalmann & Co analyst Glenn Mattson upgraded the stock to "buy."

Taser is "rightly investing" in a video segment that stands to produce a steady stream of revenue, Mattson said in his report, and investor worries that hit the stock are priced in.

Besides concerns about high marketing and other spending, new competition in law-enforcement body cameras has weighed on the stock. It tumbled 10.8 percent on Oct. 20, the day Motorola Solutions Inc (NYSE: MSI) announced its product.

"It’s going to take some time for them to really demonstrate to investors and the market that they are executing," said 1492 Capital Management portfolio manager Rodney Hathaway.

"There’s obviously a huge market opportunity," said Hathaway, whose Milwaukee firm holds Taser shares.

Seeking to make inroads in body cameras and in international markets, Taser in July projected higher second-half spending on marketing as well as research and development.

In Taser's quarterly conference call with analysts earlier this month, President Luke Larson said the company accelerated spending to help capture market share "in a limited window of opportunity as the market forms."

Taser is headquartered in Scottsdale, Arizona, but Chief Executive Officer Rick Smith has been based in Paris and plans to continue to other locations as the company tries to capitalize on international opportunities.

Between 750,000 and 850,000 uniformed public officers are in the United States, with 30,000 using a Taser video storage product, according to Oppenheimer & Co analyst Andrew Uerkwitz.

EYES ON BODY CAMERAS

The use of body cameras has gained attention as a way to increase police transparency following high-profile incidents involving use of force by law enforcement, including the shooting of Michael Brown in Ferguson, Missouri.

In tandem with those incidents, shares of Taser, a leading supplier of the cameras, tripled from July 2014 to June.

"All of a sudden, it became a national priority on a lot of levels to adopt body cameras," Mattson said, "and Taser was benefiting from being first to market."

Indeed, the shares are still up more than 60 percent since July 2014, and Taser's market value stands at around $1 billion.

The stock was trading at about 46 times forward earnings estimates as of Tuesday, down from 65 times at its peak this summer but well ahead of shares of other companies with wearable camera products, such as Motorola Solutions' at 18 times and GoPro Inc's (NASDAQ: GPRO) at 17 times. The comparison is skewed, though, because of Taser's bigger business in weapons.

Analysts on average expect Taser's revenue to increase 17 percent this year to $193 million, as it produces net income of $17.9 million, according to Thomson Reuters I/B/E/S.

"While the opportunity is very, very large and Taser is well positioned to capture the opportunity, it’s going to take time," Oppenheimer's Uerkwitz said.

Short sellers have also targeted the company. About 25 percent of Taser's float was held as short interest on Oct. 30, and the total short interest is only modestly below its level from July, according to Thomson Reuters data.

Hathaway said he would look for evidence that the expenses are producing results.

"You want to make sure there’s a good return on investment for all this extra spending on sales and marketing," Hathaway said.

(Reporting by Lewis Krauskopf in New York; Editing by Linda Stern and Lisa Von Ahn)

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