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11 Sep

DGLY – What Price Should You Pay?

by

“We have had a lot more [i]nquiries because of the civil unrest that is going on over in Ferguson,” Digital Ally (DGLY) Chief Executive Stanton Ross told Reuters.

Digital Ally reported a flurry of inquiries from police departments across the United States about the company’s ‘body cams’, following the fatal police shooting of an 18-year-old in Ferguson, MO that sparked riots there.

In addition to a five-fold spike in inquires at Digital Ally, the aftermath of the protracted civil anarchy in Ferguson stampeded more than $1B of fresh capital into a tiny sector of small-cap stocks that cater to the specialized equipment needs of police departments across America.

The three companies suddenly on the receiving end of the lion’s share of Wall Street’s ‘hot’ capital are Image Sensing Systems (ISNS), TASER International (TASR) and Digital Ally (DGLY), with the last two companies supplying law enforcement with body cameras (body cams) – the very same cameras mentioned by U.S. senator Claire McCaskill (Missouri-D) in several high-profile articles published during the past weeks.

dgly1

According to McCaskill, body cams can be effective as a means of refereeing future police encounters with the pubic, like the one in Ferguson, where conflicting recollections of the Aug. 9 event, that left 18-year-old Michael Brown dead from police gunshots, sparked several weeks of looting, vandalism and violence there.

“It seems to me that before we give federal funds to police departments, we ought to mandate that they have body cams,” McCaskill told the Missouri’s Springfield News-Leader on Aug. 26.

“I think that (body cams) would go a long way toward solving some of these problems and it would be a great legacy over this tragedy that’s occurred in Ferguson, regardless of what the facts say at the end as to whether anyone is criminally culpable,” McCaskill said.

In addition, a U.S. Justice Department investigation into the Ferguson police, as well as 130,000 signatures registered at the White House, calling for American police to be required to wear body cams, will most likely bring about mandatory body cams for police nationwide.

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Following Missouri Incident, State of Michigan Chooses a Rapid Response with $2 Million Contract to Digital Ally

While the State of Missouri ponders Senator McCaskill’s comments, the State of Michigan responded with a purchase order of $1.1 million for Digital Ally’s state-of-the-art visual technologies, with $900,000 remaining for additional purchases of campany’s equipment from the $2.0 million one-year contract recently awarded them.  And that’s on top of $4.5 million worth of shipments Digital Ally has already fulfilled with the State of Michigan under the original three-year contract.

“[I]n addition to the [Michigan] State Police, [the one-year extended contract] allows any state, municipal or county agency to purchase Digital Ally’s products without requiring competitive bid,” stated Digital Ally in the Aug. 28 news release.

Prior to the Ferguson incident, Digital Ally’s body cams represented approximately nine percent of its total revenue of $3.4 million for the second quarter.  That may about to change, according the company.

Digital Ally’s Ross stated in an article published by USA Today on Aug. 28 that, he expects revenue “will approach $22.5 million” for fiscal year 2014, based upon the marked increase in interest in the company’s products during the past several weeks.

“This is a technology that has a very real potential to serve as a check and balance on police power,” Jay Stanley, senior policy analyst at the American Civil Liberties Union, told the Associated Press.

In fact, supporters of police body cams point to a recent Cambridge University study of the Rialto, Calif. Police Department.  The city of 100,000 residents filed 89 percent less complaints against its police officers during the one-year experiment of department-wide use of body cams.  Interestingly, police reported an unexpected impact of the body cams: the public behaved more civilly, as well.

What is DGLY Worth?

Given the context of a nationwide spectacle in Ferguson, MO; the overwhelming outcry for police departments to issue body cams to its patrol officers; and a remarkably successful Cambridge University study that appears to please both the public and police, the market appears to have been broken wide open from the millions of dollars of free media publicity to the demonstrable need of Digital Ally’s body cam technology.

With an estimated 780,000 police officers patrolling American streets, Digital Ally’s contract with the State of Michigan’s 13,000-strong patrol officers accounts for a little more than one percent of the U.S. marketplace.

Using Digital Ally’s Ross’ fiscal 2014 revenue estimate of $22.5 million, the following spreadsheet (Exhibit A) estimates earnings and two additional scenarios (Scenario 1 & Scenario 2) that estimate the total revenue required to justify DGLY trading at $23.

Both the Price-to-Earnings multiples of the S&P500 and Digital Ally’s principal competitor TASER International’s p/e of, 19.72 and 39, respectively, are inputted to calculate the potential range of valuations of DGLY in the coming months and years.

Exhibit A

dgly2

Included in the spreadsheet are assumptions that gross margin will remain relatively stable at 56.7%, the Research and Development (R&D) budget will remain at approximately $3.5 million, and Sales, General and Administrative (SG&A) costs will also remain relatively stable at $9 million.

A tax rate of 34% was estimated, though the company may have accrued a substantial amount of tax credits.

And, finally, the assumption that the number of shares outstanding of 2.4 million will remain stable, as well, though the recent $4 million financial deal with WestPark Capital (announced Aug. 28) does include a convertible feature to the agreement.

Essentially, if Digital Ally reaches Ross’ total revenue of $22.5 million, the company nearly breaks even.  However, it is most likely, in our opinion, that Ross has low-balled Wall Street so that the company can benefit from a positive surprise during the coming two remaining quarters.

Irrespective of Ross’ 2014 fiscal year revenue estimate, with an addressable North American annual market for sophisticated digital video police cameras of approximately $500 million, Digital Ally is poised to rapidly grow revenue in the coming years.  If the trend toward America’s police wearing video cams spreads nationwide, as we expect, the calculation of “Scenario 1”, using total revenue of $30 million, may come as soon as next year.  In that case, a p/e multiple equivalent to TASER International’s 39-times cannot be dismissed, especially when it’s more likely that Digital Ally’s smaller revenue base can more easily be raised at a more rapid rate than TASER’s.

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About Digital Ally

Digital Ally is a technology-driven company specializing in advanced digital video police cameras, fleet event recorders and law enforcement surveillance equipment.Utilizing the newest generation of technology, we developed the industry’s first Digital In-Car Video System integrated into a rear view mirror; compact, waterproof ATV/boat/motorcycle video systems; personal body cameras; a digital video system integrated into a law enforcement grade flashlight; a revolutionary wireless microphone; robust fleet management & reporting software; and the most advanced LIDAR speed guns available. Used by everyone from the military to correctional facilities, EMTs to commercial drivers, park rangers to port authorities, police and sheriffs to private security, Digital Ally’s LIDAR and video systems offer the features and reliability you need.

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Disclosure: I currently have no position in DGLY

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