TASER International (NASDAQ: TASR) saw a significant drop last Monday, after the release of two news stories that aren't looking so good for the company.
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In this episode of Industry Focus: Energy, Sean O'Reilly and Taylor Muckerman talk about what happened earlier this month between Taser, the Supreme Court, and the NYPD; why these stories have resulted such a stark sell-off; and how the company's valuation looks today in context of this dip -- and the potential it has in the coming years and decades.
Also, the hosts take a look at Tesla Motors' (NASDAQ: TSLA) Q3 car production numbers, a big new oil draw announced by the American Petroleum Institute, and why Marathon Oil (NYSE: MRO) is showing up on our radars this week.
A full transcript follows the video.
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This podcast was recorded on Oct. 6, 2016.
Sean O'Reilly: Welcome to Industry Focus, the podcast the dives into a different sector of the stock market every day. Today is Thursday, October 6th, 2016, so we're talking about energy, materials, and industrials. I'm joined in studio by The Motley Fool's Taylor Muckerman. HappyOctober, how are you?
Taylor Muckerman: Itdoesn't own me.
O'Reilly: You don't own me, October!I like November better.
Muckerman: I like July, August, and September better. But whatever.
O'Reilly: Soyou're really sad that September is gone.
Muckerman: Itfeels good, but yeah.
O'Reilly: I runregularly here in Alexandria, and it's been really nice lately.
Muckerman: I'm sure it has been.
O'Reilly: So,a lot to cover today. Very briefly, beforewe get going, I did want toat least mentionTesla'srecent announcement that they're actually hitting their stride, finally, oncar deliveries.
Muckerman: That'swhat they say.
O'Reilly: What does that mean? [laughs] You're so mean to these people!
Muckerman: I'm a shareholder,so I want to see the November 1st financial statement released. ThenI'll be impressed, hopefully.
O'Reilly: They've beentrying to make them look good, right?
Muckerman: Yeah. They delivered 24,500 cars, then there's 5,000 in transit that will be counted in Q4. But, they're stillshy of their weekly production goalsthat they said they were going to shoot for in Q3 and Q4. Theywanted to produce 2,200vehicles per week, and they only produced around 1,900 for the third quarter. So,they have some work to do to get to 2,400 a week, which is what they wanted for the fourth quarter. But, they did deliver a 70% increase year over year, and they stemmed, theprevious twoquarters, sequentially, were down. So,the first quarter was down from the fourth quarter of year,second quarter down from the first quarter. They reversed that course, which was nice to see. But yeah, the work is stillto be done to reachfull-year numbers.
O'Reilly: Dun dun dun. Theyreiterated, though,which is nice.
Muckerman: Yeah,they say that the fourth quarter should have more production than the third, whichit would need to if they want to hit that 50,000 car mark for the second half.
O'Reilly: Cool. We'llhave to do a whole show with that one.
Muckerman: Yeah, we shall see ifall this production turned into somekind of economies of scale. Andif you look at it, you had 15,800 Model S cars, and 8,700 Model X cars.
O'Reilly: Dun dun dun. I want to test-drive a 3. Anyway. Moving on. As ourlisteners have probably noticed by now,we usually talk about oil and gas,partially because the stories over there have been so crazy in the last year or two. We talk about a little bit of Tesla,a little bit of cars, blah blah blah.
Muckerman: Solar every now and then.
O'Reilly: But,another company that has aninteresting story going on right now -- that also happens to fall under our energy, materials, and industrials brand -- isTaser.
Muckerman: I was surprised by this.
O'Reilly:[sighs] Do youwant to have this debate?
Muckerman: No, not anymore.I'm over it.
O'Reilly:[laughs] Taser International, just accept it.
Muckerman: Yeah, Taser International.
O'Reilly: Accept Taser, Taylor.
Muckerman: Sharks with laser beams attached to their heads.
O'Reilly:[laughs] Oh my god...you know what's funny? I literally just watched the first Austin Powers this weekend.
Muckerman: A classic. For the first time?
O'Reilly: No, it's been like 10 years since I've seen it. It is such a great spoof of the early Bond films.
Muckerman: It's a gem.
O'Reilly: I don't know why they didn't just keep rolling with that, because there's so much...anyway. Taser's stock fell 15%-20%.
Muckerman: It was downpretty significantly.
O'Reilly: It was not good. News, this was actually for two reasons, from what I could gather. The first was a private law enforcement equipment firmVievu -- am I pronouncing that right?
Muckerman: I'd pronounce it that way, sure.
O'Reilly: Vievu,if I'm pronouncing your name wrong, feel free to call, and, I'm sorry.They beat out Taser for acontract with the New York Police Departmentto provide more than 1,000 body cameras and unlimited cloud-based video storage. This was a big deal. It's the New York Police Department. Taser is the unchallenged leader in the sector -- they have 75%-80%. This is a big deal. After that, shares fell more than 15%. Taser actually put out a statement on this loss on their website. It's crazy. It's kind of unusual. They have tons of contracts. If you lose one contract, you put out a statement? I thought it was odd.
Muckerman: It is the growth side of their business. Tasers, the actual Taser guns, is where they got their "in" with police departments. That relationship has enabled them--
O'Reilly: It's blossomed.
Muckerman: --to buddy up on the body camera market, as well. Some people question the back-room dealings of how they got some of these contracts to become the 80% market share leader.
O'Reilly: Are you suggesting anything?
Muckerman: There's aNew York Timesarticle that I think you sent me that said that police chiefs have gone on to work for Taser after contracts had been accepted, there's been--
O'Reilly: Goldman Sachspeeps go work for the government! [laughs]
Muckerman: There have been bids that weren't necessarily made public, it was just, "Hey, Taser bid on this--"
O'Reilly: What's interesting about Vievu -- they're private, so we don't know for sure, but most people are like, "These people aren't going to make any money at these prices."
Muckerman: Yeah. Well, you have to get in there somehow, right? Still, 1,000cameras is less than 3%of the total New York City Police force. So,it's not a huge deal--
Muckerman: --for U.S.police departments. It is symbolic. And if it does work out well, there's been some chatter that maybethe demand is so high for Taser camerasthat they might not be able to keep up with it,so maybe a secondary or tertiary supplier is needed.
O'Reilly: Yeah,tons of data on that. Really quickly,you can read this whole thing on Taser.com: "Whilewe respect the decisionof NYPD's RFP committee,we feel this decision was a resultof a competitor offering their productsmirror or below costs. Our solutions havean established market value,have been proven by34 Major Citieson the Axon Network," which is their camera brand, "Ourproduct suite is better than ever, and our company is well-positioned to compete in all future Major City procurements. While we never want to lose a large deal, we are committed to doing right by our shareholders as well as our existing customers and are confident in the value of our solution." Says a lot, but not a lot.
Muckerman: Yeah. It'ssomething I feel like they might have to say. But when you look at how they started in some cities, 1,000 or 2,000cameras at a time is how they gottheir foot in the door. So this could be somewhat concerning.
O'Reilly: I'm interested to get your thoughts on this. This actually seemed worse,and nobody's really meant. This is the second reasonthat Taser is having a rough time lately. The Supreme Court recentlyrejected a bid to open a caseconcerning what is still Taser's key business, which is Tasers. That'sstill the majority of their revenue. Basically, somebody died, wrongful death, and the Supreme Court just refusedto reopen the case because they're like, "Yeah,this is use of force, and that's bad."
Muckerman: Excessive use of force. There was amentally ill person that was not being very.7..
O'Reilly: Cooperative, we'll say.
Muckerman: Yeah,kind of bear hugging a telephone pole or something like that. They Tased him to get him to release it, and he died shortly thereafter. So, while the cops weren't charged, there was aprecedent set that this was excessive force. But,it's the operator's usage of this product.
O'Reilly: It's like a gun. Guns don't kill people,people kill people.
Muckerman: With guns.
Muckerman: Maybeit's not the gun that come under fire.
O'Reilly: It wasinteresting. I actually popped on overto the SEC website, your friend and mine.
Muckerman: Look at you,using your resources.
O'Reilly: Well,I have a web browser. This definitely seemed likeit wasn't the only incidence of this happening. Ifyou look at their latest 10-Q,there are multiple pending lawsuitsagainst the company for things likewrongful death. There's like 8 or 9 of themon this filing.
Muckerman: Have youever seen someone get Tased?
O'Reilly: It'snot pretty.
Muckerman: Pretty much.I mean, it was kind of fun to watch,but in a weird, sick way.
O'Reilly: That's pretty dark, man. [laughs]
Muckerman: Well,I was walking the other direction at night--
O'Reilly: Woah, you saw this in person?!
Muckerman: Oh, yeah. I've seentwo or three people get Tased in person.
O'Reilly: Where do you live?
Muckerman: This was inWilmingtonin college in North Carolina,outside of the bar. People get unruly, man. They have to be put down.
Muckerman: Whether or not it was legit or not...the flashes shone in the trees that were lining the street, turn around andthere was a guy in the middleup the street just laid out.
O'Reilly: Wow. So, yeah,excessive use of force. But it does come down to, in your opinion--
Muckerman: I mean,it does kind of tarnish the brand. Butthe gun did not misfire. But, ifyou look at this company, the shares havedone pretty well.
O'Reilly: Yeah. This is going to be a segue into the valuation, which we really need to talk about. These two news events,basically, the bottom line is, where does this leave Taser's business today? They have thetwo businesses, the weapons segmentand the Axon segment. The Axonsegment includes not only the cameras, but the unlimited video data storage,which is under evidence.com.
Muckerman: Supposedly, the U.S. police departments combined have more Taser video footage thanall ofNetflixvideos available today.
O'Reilly: Yeah. Theevidence.com is importantbecause, having it separate from apolice department eliminates anypossibility of any kind of tampering under any circumstances. That is what the public wants. It's probably in society's best interests.
Muckerman: Unlessone of those police chiefs--
O'Reilly: I swear... [laughs]
Muckerman:[laughs] I'm just throwing that out there.
O'Reilly:All right, ladies and gentlemen, you guessed it,Taylor Muckerman does have a tinfoil hat on his head right now. It's there. I'm kidding.
Muckerman: We'renot video taping today, so there's no proof.
O'Reilly: So you can wear the tinfoil hat. [laughs] So,first six months of this year,net sales for the company came in at $114 million, up25% from last year.
Muckerman: Nice,I'll take that.
O'Reilly: Pretty good, right? Tasersegment revenues were $91.3 million. So,obviously far and away,that's 80% of their business. Up 20% from last year. Axon revenues, $22.9 million, up 50% year over yearfor the first six monthsout of 2016.
O'Reilly: That is beautiful.
Muckerman: Yeah. That'swhy the stock sold off 20%,because their growth unit is possiblyexperiencing some head winds.
O'Reilly: "Threatened" is the word.
Muckerman: When you look at it,what are the barriers to entry? Cameras are so small, and they're so durable these days. Look at Snapchat, they're coming out with their own eyeglasses with a camera in it.
O'Reilly: That's so weird to me! Remember howGoogleGlass failed? It was like, "Are you recording me when I'm talking to you?"
Muckerman: Yeah, they framed it differently. They framed it as something the user could use. Snapchat, they're presenting it as, being able to show people rather than to record people. It's just the way they're framing it. Anyway.
O'Reilly: I'm going to put on my tinfoil hat now, I'm suspicious.
Muckerman: Cameras can be put in anything, any time. They're very cheap these days.
O'Reilly: Yeah. The other thing is, they're starting to put them on police cruisers. The story's still there, I think, and I'll say why in a minute. But,you can imagine this evidence.com stuff, all this data,all of the sudden, the only parallel I can think of, and it might not be the best, is something like aYouTubeor Netflix. They justhave all this stuff, and people are giving them $10 a monthto have a subscription. So, you can imagine, if they get in on the majority of police departments, which,they have so far --market penetration isn't that high --this could be a serious cash cow in 10 years.
Muckerman: Yeah. You have thisrenewing revenue,depending on the ownership rights of the videofootage. If Taser owns it, then yeah, thesepolice departments are going to have to continue to pay storage fees.I don't think you can just delete evidence.
O'Reilly:[laughs] Unless you're one of these cops -- no, no.
Muckerman: So, what's your thoughts, long term?
O'Reilly: This thing is still pricey to me. Even after this drop, it's still at 100 times forward earnings, give or take.
O'Reilly: Anybody that'sthinking about taking their toe in the water, here, needs to be fully aware that this is thequintessential growth stock. They're not losing money,so it's not that bad.
Muckerman: Yeah,you hope it's the quintessential growth stock,with that valuation.
O'Reilly: That being said, and with this caveat,I just want to throw out there that the broad trendsunderlying the reason for Taser'svaluation are still intact. According to the Major City'sChief's PoliceAssociation--
Muckerman: Say that eight times fast.
O'Reilly: I actually can't. MCCPA -- that's not any better. But, 42 of 68 Major City police departmentsmake use of body cameras. However, this doesn't meancameras on every officer. This ignoreseverywhere else in the United States. This is a big country.
Muckerman: Yeah,it's a blue ocean out there,especially with more and more police brutalitypossibilities.
O'Reilly: Bottom line, to all ourofficers of service who are listening, we appreciate everything you do. You keep us safe,what you do is vital to society. But this trend of wanting body cameras on stuff,I cannot see it stopping.
Muckerman: No. Apparentlyoriginally, police officers were a little bit wary of it. But now--
O'Reilly: It's in their interest, too. Everybody has the facts. Because,they're probably doing the right thing.
Muckerman: Generally. That's what you would hope, right?
O'Reilly: So,bottom line, it's very hard to believe that in 10-20 years from now,we won't have a lot more cameras.
Muckerman: I agree. The cameras will be there. Just depends on whose they are. And,another point to make is, their Axon camera line is usingAmbarella chips. If you want to maybe, little aside there. Maybe,if you're an Ambarella shareholder,you might not realize that. That's something to keep an eye on.
O'Reilly: Cool. Pivoting back to our typical topic, which is oil.
Muckerman: Lay it on me.
O'Reilly: Anothersurprisingoil draw was announced last nightby the American Petroleum Institute. Itwas more or less confirmed this morningby the Energy Information Administration.
Muckerman: Theyreleased that at 10:30.
O'Reilly: API showed a 7 million barrel draw in U.S. oil inventories. EIA, this morning, said it was actually 3. But, they were projecting a 2.5 million barrel build. This has beengoing on for a little bit more than a month. Hassupply and demand balanced?
Muckerman: There was a bigsupply disruptionat the beginning of September on the East Coastwith weather-related issues. Thathampered it a little bit. On Labor Day weekend, a hurricane rolled through.I was in New Jersey, which is a big hub for refiners and oil stockpiles. Activity wasa little bit less than what it typically is. So, that kind of kick-started this inventory drawdown. West Coastterminals are still seeing inventories rise, or at least stay flat. So,the East Coast is the main driverof this. But, it's odd, because at this time of year, you usually see refineries shutter in some production and start working onmaintenance and repairs.
O'Reilly: And they're not buying crude.
Muckerman: Summer season is still busy. But, it appears that that'snot necessarily the case yet. So maybe that takes place a couple weeks later than normal. Last week or the week before, we talked aboutgasoline demand. So, maybe these refineriesfeel like they need to work a little bit extrathis refining season. But then again, you seeimports are down into the U.S. Thatkind of hints thatmaybe global supplyis still pretty high. So, the U.S. isproducing its own oil now, we're importing less and less, and things like that. So,I don't necessarily think this hints at anything other than, maybe, refiners havinghigher demand. And we witnessedthat in thegasoline datafrom last week.
O'Reilly: Cool. Before we head out,I wanted to get your thoughts on anystocks that you find interesting these days.
Muckerman: Quick hitter,Marathon Oil. It's a company that has been on a tear recently.
O'Reilly: That'smy favorite gas station.
Muckerman: About a double since lateFebruary. They made a recent purchase inOklahoma'sSTACK formation. They'rehoping to drill anywhere from 8 to 10 wells this coming quarter.
O'Reilly: That'spart of the Permian.
Muckerman: Yes. It'sone of the more highly toutedareas in the Permian. Pristine balance sheet, when you look at oil companies,producers in particular. They're only 38% debt to equity.
O'Reilly: Oh, wow.
Muckerman: Strong current ratio. So they'reliquid, and they're solvent. So they can keep producing. Ifyou want a levered play to oil prices,Marathon Oil could be it.
O'Reilly: Cool. Alright, Mr. Muckerman, thanks for your time.
Muckerman: Thank you.
O'Reilly: Have a good rest of your week.
Muckerman: You too.
O'Reilly: That's it for us, folks. We'd like to give a special shout-out to our producer, Austin Morgan. Thanks, Austin. If you're a loyal listenerand have questions or comments, we would love to hear from you. Just email us at firstname.lastname@example.org. Once again, that's email@example.com.
As always, peopleon the program may own companies discussedon the show, and The Motley Fool may haveformal recommendations for or against stocks mentioned,so don't buy or sell anything based solely on what you hearduring this program. For Taylor Muckerman, I am Sean O'Reilly, thanks for listening, and Fool on!
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Sean O'Reilly has no position in any stocks mentioned. Taylor Muckerman owns shares of Alphabet (C shares) and Tesla Motors. The Motley Fool owns shares of and recommends Alphabet (A and C shares), Ambarella, Netflix, and Tesla Motors. The Motley Fool recommends Taser International and the New York Times. Try any of our Foolish newsletter services free for 30 days.