TASER shares edged upward during regular trading hours today following a key upgrade based on the recent share price retreat, which JPMorgan analysts now say offers a “favorable” risk/ reward profile. A different analyst has taken over lead coverage of the company and has shifted to a sum-of-the parts valuation.

TASER International, Inc. Upgraded For Stock Pullback: JPMorgan

TASER to Overweight

In a report dated Jan. 6, analyst Mark Strouse assumed lead coverage of the weapons manufacturer. He upgraded its stock from Neutral to Overweight and kept his colleague’s previous price target of $25. His new sum-of-the-parts valuation assigns a value of $20 per share to the weapons business and $5 per share to the struggling video business.

He noted that TASER shares are off 47% from their highest level in June 2015, mainly because investors are worried about the company’s increased investments, pricing on E.com and new competition entering the space. The JPMorgan analyst did acknowledge that there are still risks facing the firm, especially in the video business. However, he thinks the risks are already well-known and priced into the shares.

More contracts likely ahead for TASER

Strouse noted that the weapons business provides a stable cash source as about 80% of sales come from the business. TASER enjoys dominance in the law enforcement market with relationships with 17,000 of the 18,000 U.S. law enforcement agencies. At this point, about half of law enforcement officers in the U.S. carry Tasers. He does expect sales growth in the weapons business to “moderate as the post-recession upgrade cycle nears its completion” in the U.S.

The analyst expects the New York Police Department to announce vendors for its 5,000 camera program over the next few months. TASER’s new video business is likely to be in the running, and Strouse believes most investors expect the company to win a “significant portion” of that contract. Further, while the announcement about the contract might not in itself be a catalyst for the company’s stock, it could result in other agencies that are considering launching their own body camera programs looking to TASER as a vendor.

The analyst also expects the company to finalize a contract with the London Metropolitan Police Department for its program involving 22,000 cameras. The project has already been awarded to TASER. He also said that more contract wins offer possible catalysts for the stock as the company moves to penetrate the U.S. law enforcement market even more.

Other good things for TASER

Further, he expects operating margins and cash flow to be stable, and when pairing those metrics with TASER’s solid balance sheet, he sees plenty of room for the investments the company has been making in its video business and international expansion efforts. In fact, he sees those investments as being justified over the long term. The firm’s operating expenditures climbed 33% year over year in fiscal 2015 off a 22% increase the year before.

TASER has been shelling out more in selling, general and administrative expenses with a focus on international expansion and research and development for its Evidence.com platform. He’s projecting a 21% increase in operating expenses this year, which will likely keep operating margins flat at 16% even though the company is expected to increase revenue 19% this year.

Shares of TASER climbed by as much as 3.7% to $17.65 per share during regular trading hours on Wednesday.

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