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Align Technology, Inc. (ALGN)

“According to the American Association of Orthodontists, almost 80% of all American teenagers and 1 million adults wear braces at any given time. ... In the past, correcting teeth required wearing metal braces and rubber...

“According to the American Association of Orthodontists, almost 80% of all American teenagers and 1 million adults wear braces at any given time. ... In the past, correcting teeth required wearing metal braces and rubber bands. ... Fortunately, about fifteen years ago a company by the name of Align Technology, Inc. (ALGN) came up with a product appropriately named Invisalign. Align’s Invisalign system uses clear, almost invisible casings, rather than typical metal braces, to treat the misalignment of teeth.

“And it appears that Americans were not the only demographic worried about crooked teeth. Align quickly went global with its product and it now distributes directly to orthodontists and dentists in North America, Europe, Asia-Pacific, Latin America and Japan. But Align does more than fix your teeth under the shroud of translucent braces; it makes the whole process as harmless as possible for the patient. Align works with technicians and dentists to use intra oral scanning systems. By using that technology the patient can avoid the PVS impression (where you stick a wad of wax in your mouth) for customized treatment. Align wants to shift the entire industry from wax impressions to digital case records.

“Align recently acquired Cadent to gain an edge in the digital revolution. Over the next five years, intra oral scanning will spread like wildfire. In fact, third party research from iData suggests intra oral growth rates will exceed 20% a year for the next five years. Align is aligned to participate in the best growth opportunities in dentistry and medical devices.

“At a $1.8 million market capitalization, the California medical device company has thrived since being founded in 1997. Align’s main product, Invisalign, caters to teens and adults alike. And its broad market has resulted in stable revenue growth over the years. In fact, Align has managed to grow sales every year since 2006, and even managed a 3% growth rate during the worst of the Great Recession.

“Total revenue rose an impressive 16.4% to $104.9 million in the first quarter thanks to an increasing patient population. But the numbers of new patients this year should pale in comparison when Align brings Invisalign to mainland China. ‘This is a significant milestone and we are very excited about the opportunity and growth potential for Invisalign in China,’ said Richard Twomey, Align vice president of international, in a press release. ‘With rising income levels, increased spending on discretionary items such as high-end luxury goods, and heightened focus on health and aesthetics, China is poised to be one of the fastest-growing markets for orthodontics in the foreseeable future.’

“Over the past decade, the Chinese orthodontic market has grown steadily as the importance of dental health and personal appearance has increased among the general population of 1.4 billion. Today, China is estimated to have nearly half a million new orthodontic case starts each year, with a higher percentage of complex class II and III malocclusion cases than in Western countries.

“Most orthodontic treatment is done within government-owned hospitals in major metropolitan cities; however, rising consumer demand has led to accelerated growth of private dental clinics, according to Align. China represents a huge growth opportunity for Align, but the stock does not have the huge risk carried by many Chinese companies. ‘With over 1.3 million patients treated worldwide, Invisalign is a cutting-edge treatment technology that has been used by many doctors to treat a very broad range of malocclusion,’ said Yanheng Zhou, chair of the orthodontics department at Peking University School of Stomatology. ‘The time is right for Invisalign in mainland China.’ Analysts agree with Yanheng Zhou, and have upwardly revised earnings estimates for Align. Financial results for 2011 are expected to show a 20% growth in sales to $455 million and an EPS of $0.80. Next year, EPS is expected to grow 25% to $1.01 with total sales of $514 million.

“But Align is notorious for exceeding expectations and I suspect they will again. At 20 times forward EPS, shares seem fairly priced. But the company has shown the ability to expand during recessions and the long-term impact from China will provide a massive benefit to Align’s business. Both factors indicate an upbeat future, no matter what the economy does, and should provide a tailwind for the stock this year. Additionally, the healthcare sector, which has underperformed against the market over the past two years, appears ready to regain lost ground.

“Shares are a fantastic buy below $25 and I expect them to rise to $30 over the next year. Investors looking for an easy way to straighten their portfolio need look no further than Align.”

Ian Wyatt, Top Stock Insights, 7/5/11

Ian Wyatt is an active investor, a well-regarded investment expert and an Internet entrepreneur. He is the Chief Investment Strategist at Wyatt Investment Research, publisher of Top Stock Insights and plays a leading role in each of the company’s investment newsletters and trading services. Ian founded Business Financial Publishing and Wyatt Investment Research in 2001, publishing investment newsletters for individual investors. Since then, the company has evolved into an Internet content company publishing e-letters, special research reports, newsletters, trading services and financial web sites.