Align Technology (ALGN) has advanced more than 127% over the past year. This Zacks #1 Rank (Strong Buy), medical device company is scheduled to report quarterly results next week, and has delivered earnings surprises over the last six quarters with an average beat of 22.5%.
Given the long-term growth projection of about 18%, an uptrend in earnings estimates and strong potential in the malocclusion market, Align Technology appears to have bright prospects ahead.
Fiscal Third Quarter on Deck
Align Technology is scheduled to report its fiscal third quarter results on October 17. It is expected to earn 29 cents per share from $140 million in revenues, according to Zacks Consensus Estimates.
The company last reported on July 19. Adjusted earnings in the fiscal second quarter increased 70% year over year to 34 cents, beating the Zacks Consensus Estimate by 21.4%. Adjusted earnings were also ahead of the company’s guidance of 26 cents - 28 cents.
Total revenue increased 21.2% year over year to $145.6 million, exceeding the Zacks Consensus Estimate of $143 million by 1.8% and the company’s guidance range of $140.2 million to $143.7 million.
Revenues from Align’s two operating segments – Clear Aligner and Scanner and CAD/CAM Services – recorded respective revenues of $133.7 million (up 17.6% year over year) and $11.9 million (up 85.9%). The company derives revenues from scanner and CAD/CAM services through the acquisition of Cadent Holdings in April 2011. Thus, the year-ago quarter included two months of scanner and CAD/CAM services sales.
Banking on its core product, Invisalign, Align Technology has established itself as a strong player in the malocclusion market. Over the past few quarters, sales have increased consistently due to the strength of this product. Moreover, several features have been introduced across the Invisalign system to address some of the most significant treatment challenges encountered by doctors.
The company’s Invisalign G3 and G4 are working successfully for its class II and class III patients. Orthodontic customers are now more confident of using Invisalign with the clinical improvements witnessed in G3 and G4. These features are working as major catalysts in helping the company strengthen its foothold in the huge teenage orthodontic market.
Earnings Estimates on the Rise
The Zacks Consensus Estimate for 2012 has risen 6.1% over the past 90 days to $1.22 per share, representing year-over-year growth of more than 25.0%. Meanwhile, the Zacks Consensus Estimate for 2013 has risen 3.7% to $1.39 per share over the same time frame, representing year-over-year growth of about 14.8%.
Premium Valuation
Align Technology’s valuation looks stretched compared to its peers by most metrics. Based on the 2012 earnings estimate, the company is trading at a P/E of 31.4x, which is almost 1.5 times the peer group average of 20.1x. The price-to-book ratio of 5.2x is also substantially higher than the peer group average of 1.9x. The premium is warranted given a higher long-term earnings growth rate (18.0%) compared with the industry average (15.0%).
Even so, shares look pretty impressive with a return on investment (ROI) of 18.6%, which is much better than the peer group average of 7.9%. This implies that the company reinvests its earnings more efficiently than its peer group. With respect to return on equity (ROE) as well, shares of Align Technology look attractive at 18.6%, well above the peer group average of 8.7%.
Chart Reflects Strength
The stock price performance of Align Technology has been reasonably strong with the chart showing an upward trend over the past year. The stock reached its 52-week high of $39.82 on September 13, 2012 and is hovering around that level at present.
Moreover, the stock is currently trading above its 50- and 200-day moving averages, which stand at $35.7 and $30.4, respectively. In fact, except for some minor pullbacks, shares have fared better since late October 2011 than the simple moving average for 200 and 50 days. The one-year return for the stock is noteworthy at 127.2% compared to the meager 25.5% return for the S&P 500 index.
Align Technology manufactures and markets a system of clear aligner therapy, intra-oral scanners and CAD/CAM digital services used in dentistry, orthodontics, and dental records storage. The company’s core product, the Invisalign system, is a proprietary method for treating malocclusion based on a series of clear plastic removable orthodontic aligners. Malocclusion, or the misalignment of teeth, is one of the most prevalent clinical dental conditions, affecting nearly a billion people, or approximately 50%-75% of the population of major developed countries.
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