Has Taser (Nasdaq: TASR) turned the corner?

• BUY TASR near $8.16, set stop loss at $7.00

Taser International, Inc. (Nasdaq: TASR) designs, manufactures, and markets the TASER line of stun guns. The company had a wild ride from 2003-2005. Shares of Taser exploded in 2003 and 2004 due to rapid sales growth and a massive short squeeze. In 2005 shares of Taser cratered as the company tried to deal with a bevy of new problems including product safety lawsuits, shareholder lawsuits, slowing growth, and accounting issues.

Recent results show that Taser is back on track. In the fourth quarter of 2006 Taser posted revenue of $19.3 million and net income of $2.3 million. Revenue was up 53% from the fourth quarter of 2005 and up 5% sequentially from the third quarter of 2006. Profits have grown consistently for four straight quarters.

Taser has a market cap of about $500 million, cash of about $22 million and no significant long term debt. Taser does not have a trailing P/E due to a net loss in fiscal 2006, but based on analyst estimates Taser has a forward P/E near 20.

Taser has sold products to more than 10,000 US law enforcement agencies and 1,700 law enforcement agencies have issued Taser’s to all patrol officers. Analysts expect strong sales growth to continue in the US law enforcement sector. So far sales to the public and the military have been minimal, but Taser hopes to increase sales in these two channels soon. This summer Taser will begin selling a smaller version of its police weapon to the public. Although previous efforts to sell Taser products directly to the public have had disappointing results, the new Taser C2 has a smaller profile and a lower price point ($299 without laser, $349 with laser) which could translate into higher sales.

Taser also plans to expand into a wide range of military applications. Although these technologies are still in the development stage, Taser sees military applications such as their Warfighter and Tasernet programs as significant growth opportunities.

Recently a US district court in New York dismissed a product liability lawsuit against Taser. This marks the 37^th consecutive wrongful death or injury lawsuit against the company that has been either dismissed or decided in favor of Taser.

Although Taser’s sales and profits have rebounded there are still a number of controversial issues surrounding the company. Human rights activists claim that Taser’s stun guns are dangerous and may cause heart attacks. Despite Taser’s excellent court room record, the company will continue to spend money defending these cases for the foreseeable future.

Taser’s fourth quarter results show strong growth in a company that has a near monopoly. Law enforcement sales should continue to be brisk while the new C2 Taser should help jumpstart home defense product sales. Although Taser will continue to have legal expenses, they recently settled the outstanding shareholder lawsuit and they have a growing portfolio of case law in their favor which should limit the number of personal injury suits going forward.

Although sales and profits have turned around, Taser’s stock has been stagnant. We think that shares of Taser represent a compelling value at current prices. Taser has limited competition and previous product safety issues were the main barrier to sales growth. Many of the negative legal issues and product liability claims plaguing Taser have recently been mitigated opening the door for continued growth in revenues and profits.

Full disclosure: Wall Street Mayhem is long TASR