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A Stunning Opportunity

Taser International is no stranger to controversy. That may be why its shares are down, despite forecasts of strong growth.

Who says crime doesn't pay? Taser International hopes that it not only pays handsomely but also remains a growth industry. Well, maybe not crime, exactly, but crime fighting.

Taser produces electronic control devices -- stun guns, in the vernacular -- used by the police and corrections officers, the military, and even by crime-wary consumers. Tasers temporarily disable threatening or dangerous individuals or those resisting arrest -- including one unruly college student who disrupted a political speech, as seen in the notorious video that made "Don't tase me, Bro!" a catchphrase of 2007.

But as much as perps on the mean streets may hate the company's devices, you may love the company's shares. Wall Street analysts certainly do: Most are telling clients to buy the stock (symbol TASR), which at $11 is two-thirds off its late-2004 high. Analysts see earnings jumping roughly 50% this year and next as Taser penetrates largely untapped markets here and abroad, with essentially no competition. "To us, it's a category killer," says Steven Dyer, of Craig-Hallum, a Minneapolis brokerage.

The Scottsdale, Ariz., company has sold more than 400,000 devices to some 12,000 agencies, primarily U.S. law-enforcement and corrections officers. But that's only 25% to 30% of the domestic market and less than 5% of the worldwide market. Taser has barely tapped the private-security, military and consumer markets.

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Overseas business, which accounted for about 15% of 2007 sales, should take on a bigger role this year. So should sales to ordinary Joes and Janes. Taser's C2 model (about $350) began shipping in the third quarter, some in leopard print or fashion pink. The C2 could generate almost 10% of company sales this year, up from less than 4% in '07, estimates Eric Wold, of San Francisco-based broker Merriman Curhan Ford.

One challenge is to boost profit margins, which have sagged lately. Taser says it has taken an ax to distributor discounts, negotiated price reductions with suppliers and smoothed payroll bumps by cutting overtime.

Despite Taser's potential, you need to have a strong stomach to own the stock. It is particularly vulnerable to concerns about safety; it struggled last fall after news that a man died at a Canadian airport after being hit with a Taser.

Taser says the devices have actually saved lives by reducing risks to law-enforcement officers and suspects alike, compared with using a gun or other physical-control method. But the devices are clearly controversial, and their use is restricted in some states. Taser is no stranger to litigation charging wrongful death or injury, but it hasn't lost a case so far. Says chairman Tom Smith: "The same batteries that run a digital camera run our Taser. That shows the low power output." Still, an adverse ruling could be devastating.

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But the bulls believe patient investors will be rewarded. Considering Taser's growth prospects, says Wold, the stock should trade at 40 to 45 times estimated earnings. Given his profit forecast of 52 cents a share for 2009, he thinks the stock could reach $21 over the next year. Perhaps $17 a share is more realistic -- but still stunning.