TASER Losing Its Zip

Is Wall Street becoming the funny pages? First we had all that excitement a couple of weeks back about Spider Man and whether his hunt for the Green Goblin would put a few more dollars on the price of Marvel Enterprises. And now we've got a whole new childhood hero who seems to have gotten loose at the corner of Broad and Wall. 

We're speaking, of course, of Tom Swift and his electric rifle. Seemingly overnight, Tom and his rifle have become America's (or at least Wall Street's) newest and most potent weapon yet in the fight to defeat the al Qaeda network. 

Confused? Then you haven't been following the meteoric rise of TASER International Inc. of Scottsdale, Ariz., which has soared from $6 to nearly $21 per share on America's fear of flying in the wake of the terrorist attacks of Sept. 11. 

TASER International makes those high-voltage stun guns that some folks now want to provide to all U.S. airline pilots as general-issue flying gear. This way, when some al Qaeda nut job comes running down the aisle with his sneakers on fire, a member of the cabin crew can simply whip out his trusty .44 Magnum-sized TASER and zap him to the floor without ever breaking a sweat. 

Sound good? Well, it sounds even better when you consider that TASER is actually an acronym for the 1911 adventure classic for boys, "Tom Swift And His Electric Rifle" by Victor Appleton. 

TASER International was founded in 1993 by two brothers, Rick and Tom Smith, after two of their friends were killed in road rage incidents and the Smith brothers decided that folks needed better - and safer - personal protection than simply handguns. 

So they turned to a retired NASA scientist who had developed a stun gun in the 1970s, giving it the TASER acronym because, it would seem, the Tom Swift character had made an indelible impression on him when he'd first read of his electric rifle adventures as a boy. 

In any event, just as Tom Swift used his electric rifle to hunt elephants in Africa, Rick and Tom Smith now see the weapons as just the thing to bag America's newest big game: terrorists at 30,000 feet. 

Now I, for one, would not begin to offer an opinion either way as to whether a pistol that shoots sparks instead of bullets is what we need to take down some maniac who comes storming out of the washroom of a 747 brandishing a tweezers and a snack-pack of peanuts. 

But I will say that any investor who thinks this company is a good buy at its current price of about $18 per share, would find his time well spent to hasten forthwith to his nearest neighborhood TASER retailery, obtain one for a fair price, then place it to his temple and squeeze off a wake-up call. 

That is because simple arithmetic, which I'll unfold for you in a minute, shows pretty clearly that to justify its $18 per share price, TASER International will have to sell TASER stun guns by the tens of thousands yearly, to every commercial airline on earth. 

The fact that TASER's shares have lately begun to weaken from their $21 high of late April suggests that investors have belatedly begun to realize that this is hardly likely to happen, and that no reasonable argument can be made to justify any further advance in TASER's wildly over-priced shares. 

So, folks have begun taking their profits in a stock that now seems to have no place to go but down. 

The entire run-up in the shares turns out to have been based largely on hope and wishful thinking, much of it related to continuing objections from Washington to the idea of arming pilots with conventional weapons on commercial aircraft. 

Transportation Secretary Norman Mineta and Homeland honcho Tom Ridge both oppose the idea of guns in the cockpit, and White House Press Secretary Ari Fleischer last week reiterated President Bush's opposition to the idea as well. 

This has seemed to strengthen the case that the administration would be ultimately driven to TASERs as an alternative. According to their supporters, TASERS can't damage a plane's instruments or electrical systems, nor punch a hole in the aircraft itself. 

So, when United Airlines placed an order earlier this year for 1,300 TASERS, and began training its pilots in their use in hopes that the administration would let the pilots use them in emergencies, the company's stock leaped in the belief that other airlines would soon follow and a bandwagon would develop. 

But just as Marvel Enterprises soared in anticipation that the "Spider-Man" movie would be a smash hit, then began weakening the very instant the movie proved a box office success, so too does it seem that TASER's shares have now topped out, no matter what the administration does or doesn't do. 

Basically, the market for these devices just isn't big enough to justify the stock's price. United Airlines' purchase of 1,300 TASERS works out to just about 2.5 TASERS for each of UAL's 543 aircraft. But the entire order was worth only $750,000 to TASER International. 

If all remaining major and top regional U.S. airlines bought TASERS in similar per- plane quantities, the total revenues to TASER International would equal a mere $4.5 million. With TASER International currently running at a roughly 17 percent operating margin, only about $460,000 of that $4.5 million would translate into net after-tax income. 

With 3.8 million shares currently outstanding, this bottom line income would translate into net earnings of roughly 12 cents per share, meaning that at the stock's current price of $18, the shares are trading at 150 times earnings from a one-time set of contract sales that may actually never take place at all. This is a pipe dream multiple rarely seen in a stock in even the dizziest days of the dot-com bubble. 

In other words, with each $575 TASER generating a tiny fraction of a cent per share of earnings, TASER International will have to sell roughly 44,000 TASERS yearly - which means three TASERS for every commercial aircraft in the skies, worldwide - simply to be valued at the 37.5 times current earning multiple at which it traded last summer before the 9/11 panic distorted everything. 

And that multiple is itself obviously too high. With the 30 stocks of the Dow industrials now selling for 20 times year-ahead earnings, a good argument can be made that TASER International will have to sell more than 100,000 stun guns yearly to justify its current price. 

That is clearly ridiculous, which is why bulls on the stock are now talking up the earth-bound market for the guns, among local police departments and whatnot. But all of that is just hopeful thinking to justify the price run-up that is simply not supported by the market potential that caused the surge in the first place. 

One never knows about these things, but just like Marvel Entertainment before it, TASER International has all the earmarks of a stock that has by now maxed out on the rumors and one way or another appears poised to fall on the news, whatever it may be.