TASER Stock Upgraded: 3 Things You Need to Know

TASER International grew its sales 24% last quarter, but its stock is down 20% over the past year. Does that make sense?

Maybe it does. After all, the same quarter that saw TASER ramp sales sharply also saw the stock's profits cut in half. On the other hand, one banker that follows TASER stock closely thinks investors are giving TASER little credit for its dominant market share, strong growth prospects, and its ability to expand margins and rake in the cash. This morning, analysts at CL King announced they are upgrading TASER stock from neutral to buy, and assigning a $32 price target to the stock.

Here are three things you need to know about the upgrade.

TASER's Axon body and Flex cameras. Image source:TASER International.

Thing No. 1: Dominant market share

TASER operates in two main industries -- and dominates the competition in both of them. According to its own SEC filings, TASER's only significant rival in the market for non-lethal weapons used by police is tiny OTC-traded Defense Technology Systems -- which, according to data from S&P Global Market Intelligence, books less than $1 million in sales annually.

Last year, TASER's Weapons division sold $162.4 million worth of stun guns and accessories.

TASER is nearly as dominant in the market for body cameras for police. Our own research shows that TASER has two main rivals in this market -- privately held VieVu and publicly traded microcap Digital Ally. When last I spoke with TASER, though, they were still winning "well over 90%" of police body camera contracts going up for bid. S&P Global data bear this out.TASER's revenue from the sale of Axon cameras and related EVIDENCE.com subscriptions alone top $35 million.

Thing No. 2: Strong growth, and more where that came from

A second reason CL King likes TASER, according to a write-up on TheFly.com, is the company's history of "strong organic growth" and its prospects for more growth abroad, due to its present "low international market exposure."

Historically, TASER has received fewer than $1 in $5 from sales made abroad, which supports CL's view that this is a market ripe for picking -- just as TASER has proved adept at picking up sales here in the U.S. Over the past five years, TASER averaged better than 19% annualized sales growth, and EBITDA growth verging on 48%.

Thing No. 3: Sales growth -- and earnings growth, too

One place where TASER has historically failed to measure up, of course, is in translating sales into profits. While it's true that EBITDA (earnings before interest, taxes, depreciation and amortization) have been growing strongly at TASER, the company has had some difficulty in dropping it down to the bottom line. Indeed, Yahoo! Finance figures show net profits at TASER have compounded at less than 15% annually over the last five years -- a very respectable growth rate to be sure, but slower than sales have been growing, and much slower than the rate of EBITDA growth.

In part, this is due to the fact that TASER has allowed its profit margin to deteriorate markedly, from a highof 14.9% being earned back in 2007, to a recent high of 13.2% in 2013...to just 7.8% earned over the past 12 months.

The most important thing: Valuation

CL King believes this is a trend that TASER can reverse, and predicts "accelerating earnings growth and margin expansion going forward."

Whether that's how things play out remains to be seen. Meanwhile, TASER's strong sales growth/weak profits performance combination has the stock trading for a very rich P/E ratio of more than 86 times earnings. Free cash flow is quite a bit stronger -- $33.6 million generated over the past 12 months -- but even so, TASER stock looks richly valued at more than 39 times free cash flow today.

At today's prices, TASER needs to muster every bit of sales growth that CL King hopes it will produce, stabilize and then grow those profit margins, and max out every bit of the 30% annualized earnings growth that Wall Street thinks it capable of to make the stock cheap enough to buy.

It's a tall order, and until we see proof that TASER can grow both sales and profits rapidly, I have to disagree with CL King: TASER may be a great company, but as an investment, TASER stock still looks too expensive to buy.

The article TASER Stock Upgraded: 3 Things You Need to Know originally appeared on Fool.com.

Fool contributorRich Smithdoes not own shares of, nor is he short, any company named above. You can find him onMotley Fool CAPS, publicly pontificating under the handleTMFDitty, where he currently ranks No. 306 out of more than 75,000 rated members.The Motley Fool recommends TASER International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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