Zacks has initiated coverage of Guardian 8 Holdings (GRDH) with an Outperform rating and a target of $0.70. Guardian 8 Holdings is the developer and manufacturer of the G8 Pro V2, a non-lethal security device the designed for use in the professional security industry. The innovative product has created a new non-lethal security device category which management has dubbed Enhanced Non-Lethals (ENL), namely multi-function professional security defense devices positioned between Conducted Electrical Weapons and single-function devices. The first 120 units of the G8 Pro V2 were produced in July and are currently being evaluated for deployment by corporate security departments both domestically and abroad.
The G8 Pro V2 provides security guards with eight non-lethal methods of action that are designed to de-escalate a confrontation during an encounter with a perceived threat between a security guard and a trespasser. The hand-held unit provides three levels of response to an approaching and intensifying threat, namely an auto-record microphone, a high-resolution camera, a red laser targeting beam, an alerting siren, an LED strobe light, a prerecorded alert message, push-to-talk communications and last line of defense, oleoresin capsicum (OC) pepper spray.
Guardian 8's innovative product addresses a need within the professional security industry that is positioned between Conducted Electrical Weapons used by law enforcement and corrections officers and non-lethal pepper spray, primarily designed for the retail consumer market. The product is more sophisticated and robust, both in performance and in appearance, than pepper spray alone. Moreover, the G-8 Pro V2 is not subject to regulations which relate to the use of stun guns, hand-held shot devices, electronic weapons and other hard techniques that inflict temporary incapacitation in the force continuum. The device and its OC canisters are legal in all 50 states.
For the last two years, management has been cultivating interest in the product through exhibitions at national and regional trade shows and with direct contact with the security departments of major corporations. While still in the pre-production R&D phase, the company’s device received a “Security’s Best” award from ASIS. Since interest in the initial units has been high, an additional 1,800 units are currently in production. Guardian 8 continues to build awareness and promote adoption of the G8 Pro V2 and is offering training classes on September 27, 2013 at the security’s industry premier event, the ASIS 2013 conference in Chicago.
Also, the company’s web store, which sells the G8 Pro V2 device and its accessories, is fully functional. After the commercial launch of the company's initial device for the corporate market, management plans to design and sell a personal defense model targeting the consumer market for use by private individuals.
Our price target is based on price-to-sales (P/S) valuation methodology. Guardian 8 is a small-capitalization company, currently with negative profitability, but with an expected sales profile that should grow and expand over time as the company’s initial product begins to be deployed within the private security industry. We have examined the valuation progression of the stock of TASER International (TASR) during its formative years, which appears to be relevant to Guardian 8. Not only do both TASER and Guardian 8 operate in the protection-safety industry and focus on self-defense devices, but also TASER began as a single product company and evolved through the development and introduction of next generation devices.
We expect the valuation of Guardian 8 to be similar to TASER’s. Guardian 8‘s revenue profile is expected to exhibit dramatic growth through management’s execution of its strategy to market the company’s novel defense device, which targets an unaddressed need of the security guard industry. We expect Guardian’s stock to trade initially in a price-to-sales valuation range between 3.0 and 11.0. If and when the company’s sales exceed $5.0 annually, the stock valuation range is expected to expand to a higher premium multiple that is usually afforded small-cap companies that exhibit rapid sales growth and that operationally cross the breakeven point to profitability, which is also supported by the analysis of TASER’s historical valuation profile.
Since Guardian 8 has the potential and is expected to generate meaningful revenues beginning in the fourth quarter of 2013, our price target is based on a price-to-sales ratio valuation using estimated revenues for 2014. At a P/S ratio of 11.0 on next year’s projected sales of $3.0 million, our price target is $0.70.
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