Editor's note: This Stocks Under $10 alert was originally sent to subscribers April 30 at 2:55 p.m. EDT. It's being republished as a bonus for TheStreet.com and RealMoney.com readers.

After you read this, we will initiate a 600-share position in

Taser International


in the Stocks Under $10 model portfolio. Last week, the stun-gun maker reported quarterly results that fell short of estimates, creating an opportune entry point for us. Shares were recently trading at $8.35 and have a very favorable risk/reward at the current price.

On April 3, Taser warned that its results for the first quarter would miss estimates because of the delay of some orders. Shares sank below $8 on the news, given the high expectations following last quarter's solid results. Taser is now 22% off its 52-week high around $11, set a year ago, while most of the major indices have seen gains of 15% or more over the same time frame.

One of the biggest disappointments for the quarter was a drop in gross margins to 58.1% from 64.5% last year. Lower gross margins are normally seen as a negative, but this decline was the result of three setbacks: lower sales from the delay of several orders, investments in upcoming product launches, and additional costs associated with expanding capacity to meet growing demand.

So let's examine these issues in more detail.

Sizing Up the Setbacks

First, let's look at the delays. Management confirmed that many orders are still on track, but large orders tend to take longer to be completed because they involve more bureaucracy as city managers and councils wrestle with getting budgets approved. This drawn-out process was evident in the purchase of 3,000 Taser stun guns by the Pennsylvania State Troopers agency on April 4, which was later than anticipated. Meanwhile, an expected order from the Los Angeles Police Department, which employs 6,000 officers, has been delayed since last fall because of similar bureaucratic hurdles.

As for new products, Taser recently launched the C2, a self-defense stun gun for the consumer. The company is in the early stages of an advertising campaign and expects to eventually sell the product in sporting goods stores and other retail outlets. Also, the company just launched the Taser Cam -- a camera with audio capability that attaches to its signature X26 law enforcement stun-gun model.

The Taser Cam -- which provides evidence of hostile situations in which police officers use a stun gun over a handgun -- creates several catalysts for the company to boost revenue, including an add-on sales base to its largest selling product. Currently, there are more than 187,000 X26 stun guns in the field that could potentially be upgraded with the Taser Cam.

The last setback stemmed from the enormous demand internationally, which has created additional costs for Taser as it increases production capacity. International sales now account for 14% of total revenue, up from just 4% in 2004. The company is focusing on the U.K. and especially France, which made an initial purchase in December.

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French presidential candidate Nicolas Sarkozy, who currently leads in the polls, has stated that he would like to place a Taser stun gun in all 100,000 police cruisers in the country. Also, there are 250,000 to 300,000 officers in France, another potential market. Assuming that just 20% of French police officers are required to have Tasers, this would open up a sizable revenue stream, not only from the sale of stun guns, but for Taser Cams and cartridges -- which is the company's second-largest revenue generator.

The U.K. could also represent a huge area for international growth; its police force is awaiting government approval to allow Tasers to be deployed to all officers. Also, New Zealand is trying the stun guns in a one-year trial, with positive results so far, according to Taser's management. Two other European countries, which management did not specify, have recently begun trials of Taser stun guns.

So, while lower margins for the quarter raised a temporary red flag, we believe the miss was justified. The delayed orders will most likely be booked, and the company's new products and increasing cost to expand capacity will pay off over the longer term as orders begin to flow in, especially from markets abroad.

A Solid Balance Sheet

Taser also looks attractive from a financial perspective. The company has relatively no debt and about $16 million in cash. Although shares are trading at about 22 times expected 2008 earnings per share of 37 cents, revenue is expected to grow at an average annual rate of 36% over the next three years, according to Capital IQ. This estimate does not include the international growth potential we highlighted above.

Taser also has a $10 million share-buyback program in place, of which only $2.2 million has been completed. It would not surprise us to see management step in at these levels and buy back more of its shares.

Despite these huge growth opportunities, there are risks, notably on the legal side. The company has been involved in numerous lawsuits from individuals claiming that Taser stun guns caused injury, and even death in some cases. However, the company has been aggressive in fighting these accusations, which has resulted in many dismissals.

As of the latest quarter, there were 47 total pending lawsuits, down from 57 the previous quarter, and 44 lawsuits that have been dismissed. So far, the plaintiffs in each case have not been able to prove that the Taser device was the cause of any injury or death. The company also has more than 80 medical studies that affirm the safety of the product, and its introduction of the Taser Cam will likely provide evidence in real-time situations, validating the company's claim that Taser stun guns are safe.

So despite the potential drag as these lawsuits wind their way through the legal system, we believe the shares could move in excess of 25% in the short term, based on Taser's international growth potential and its line of new products being rolled out this year.

In keeping with TSC's editorial policy, Frank Curzio doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Frank X. Curzio is a research associate at TheStreet.com, where he works closely with Jim Cramer and and writes

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. Previously, he was the editor of The FXC Newsletter and senior research analyst for Greentree Financial, and passed his Series 7, 63 and 65. He appreciates your feedback;

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