The shares of this medical device company have recently been upgraded at UBS to ‘Buy.’
Align Technology, Inc. (ALGN)
From Investor Advisory Service
Align Technology makes Invisalign brand clear orthodontic braces which it calls “aligners.” These are more expensive than wire-and-bracket braces, but they offer many advantages, with improved aesthetics high on the list. They can also be removed for meals and toothbrushing, require less labor when starting new cases, and allow treatment to progress with fewer office visits. Clear aligners make tooth straightening services available in practices that did not historically offer wire-and-bracket solutions, especially outside of the U.S.
Aligners have gross margins over 70% and account for approximately 80% of revenue. The company’s other business is digital scanners and solutions. Align sells the leading brand of intraoral scanners, iTero. These are useful for planning new Invisalign cases but are also integrated into the wider dental/orthodontic practice to support a full range of aesthetic and restorative treatments.
We expect Align to continue to grow its presence adjacent to its tooth-straightening, such as implants and tooth-whitening.
Align was previously in the IAS but was de-listed due to extreme valuation in 2018. It reentered the IAS in May of 2020 after its highflying shares experienced a severe price decline at the beginning of the pandemic. After some early panic, it looks like the pandemic has accelerated the company’s growth trajectory, as a less invasive treatment option suddenly appeals both to patients and to the doctors who may have enjoyed higher margins and greater familiarity with traditional bracket-and-wire solutions.
After first achieving regulatory clearance in 1998, clear aligners grew steadily in the United States but took longer to catch a foothold in overseas markets. They have grown rapidly in many markets where tooth straightening was historically uncommon. International revenue was over 40% of the total in 2019. The pandemic disrupted growth patterns, but it appears that international could overtake U.S. revenue as soon as this year. International prices and margins are a little lower, and while the increasing mix of international business has been a modest drag on gross margins, the difference is not very great.
The market for tooth straightening is enormous worldwide, probably too big for one company to dominate like Align currently does. That said, competitive solutions have not gained a lot of ground so far. Align is not strictly playing defense. As mentioned above, it can also push into new treatments, and potentially practice management as well, using its scanners as an entry point.
Revenue has compounded faster than 20% annually for ten years. That pace seems likely to slow going forward. It is very hard to double revenue every four years, although recent results have continued to exceed that pace without any obvious sign of near-term deceleration. What is even more exciting is the potential for further operating leverage. Earnings growth has compounded at greater than 30% annually over the past decade. Those are some of the fastest growth rates among companies we track in the IAS, and it should be no surprise that ALGN shares also trade at one of the highest valuation ranges.
During the post-pandemic stock market boom investors became very cavalier about paying huge valuations for fast-growing companies. As the Federal Reserve has finally started to slow its pace of monetary assistance, highly-valued growth stocks have lost some luster. This includes Align, which is why shares look buyable again. The recent price momentum for these kinds of opportunities remains a little alarming, but we think investors brave enough to catch the falling knife will be rewarded in this case. The future is always uncertain, but it is hard to imagine Align failing to grow into its current valuation within a reasonable time horizon.
We model 18% compound EPS growth, which could generate EPS of $25.53 in five years. That figure, combined with a high P/E of 35, generates a high price of 894. For a low price, we contemplate 18% downside to $400. On that basis, the upside/downside ratio is 4.5 to 1.
Doug Gerlach, InvestorAdvisoryService.com, 1-877-33-ICLUB, February 2022