Align Technology Stays Neutral

We recently reiterated our Neutral recommendation on Align Technology (ALGN) with a target price of $18.00.

During the second quarter of fiscal 2010, Align Technology reported adjusted EPS of $0.21 surpassing the Zacks Consensus Estimates of $0.14 and the year-ago quarter’s $0.07. Revenue was $108.2 million, an increase of 41.8% year over year and 20.1% sequentially. However, excluding deferred revenue for Invisalign Teen replacement aligners, revenue increased 23% year over year to $93.9 million.

Align Technology manufactures and markets the Invisalignsystem, a proprietary method for treating malocclusion or misalignment of teeth, a market, which has tremendous growth opportunity. It is estimated that malocclusion affects roughly 50%-75% of the population of major developed countries or nearly a billion individuals. Out of this, 2.2 million people have mild to moderate malocclusion and are eligible for Invisalign treatment. Because of some drawbacks associated with traditional orthodontic treatments, a relatively small proportion of people with malocclusion seek treatment. As a result, the market is severely under-penetrated. Align can increase its market share by tapping this under-penetrated market.

Align Technology’s Invisalign Teen, targeted at the teenage population is gaining wider acceptance. Revenues from these products recorded a growth of 52.7% during the quarter, which was primarily driven by the rise in patient population. The number of teenage patients (under 19 years) increased 10% sequentially and 40% annually to reach 22% of total worldwide volume compared to 20% in 2009 and 17% in 2008. This implies continuous share gain in the teenage segment.

Moreover, the company has adopted several strategies to improve adoption of Invisalign. This is evident from the improvement in utilization rates (number of cases shipped/number of doctors to whom cases are shipped). During the second quarter, total utilization increased across the customer base to 3.7 cases per quarter compared to 3.5 in the first quarter and 3 in the year-ago period. The reported quarter also witnessed a boom in international business.

However, we remain concerned about the tough competitive landscape that resulted in a continuous decline in prices over the past few quarters. Moreover, one of its competitors, Dentsply International (XRAY) is expected to launch MTM clear aligner in the near future, which could further intensify competition. We also remain concerned about the economic uncertainty as these procedures, being elective in nature, often get deferred.

ALIGN TECH INC (ALGN): Free Stock Analysis Report

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