(ALGN) Align Analyst Reaffirms Shares at Neutral

Recently, we reiterated our ‘Neutral’ recommendation on Align Technology (ALGN) with a target price of $24.00.

Align reported first quarter adjusted EPS of 21 cents, which missed  both the Zacks Consensus Estimate of 17 cents and the year-ago quarter’s 20 cents. Sequentially, adjusted EPS increased 50% from 14 cents.

Align witnessed balanced sales growth across all its channels during the first quarter of fiscal 2011. Total revenue increased 16.4% year over year to $104.9 million,  beating the company’s guided range  of $99.0?$102.5 million as well as the Zacks Consensus Estimate of $101.0 million.

The positive growth resulted from increased number of patients visiting the clinics along with growing interest for high-value procedures like Invisalign full. Besides, there has been a continued mix shift toward Invisalign Assist arising from Align’s efforts to encourage newly trained and lower volume doctors to utilize Assist as their main Invisalign offering.

We strongly believe Align will continue to exhibit strong growth momentum on the back of several strategic initiatives, including the recent launch of Invisalign G3 in North America. Based on a survey conducted in February 2011, the company considers Invisalign G3 to be the key reason for its continuous penetration in Ortho practices, reflecting  a faster growth rate than the overall market.

Align has undertaken several strategies for easier and wider adoption of its core product, Invisalign. These include acceleration of product/technology development, greater clinical effectiveness, extension of Invisalign brand and driving international growth.

Align is making good progress in Germany, France Spain and Italy. However, the widespread austerity measures in both public and private sectors led to a softer performance in the UK.  Moreover, the APAC, EMEA and Latin America regions continue to deliver strong volume growth through distributors. The company also strengthened its sales force and added territory managers in targeted international markets. Revenues derived from the international market increased 7% on a sequential basis and 17% annually.

Moreover, the company intends to further expand its footprint in the malocclusion market by aggressively marketing Invisalign to both doctors and patients. In April 2011, Align completed the acquisition of privately-held Cadent Holdings, a provider of 3D digital scanning solutions for orthodontics and dentistry and maker of the iTero and OrthoCAD iOC scanning systems for $190 million in cash. Both the companies seeks to jointly develop software applications, which will run on Cadent scanners for use in Invisalign treatment. We are also encouraged by the company’s strong outlook for the second quarter of 2011.

However, we remain concerned about the tough competitive landscape that resulted in a continuous decline in the blendedprices over the past few quarters. We also remain concerned about the economic uncertainty as it makes patient defer the dental procedures, being elective in nature. Although Align has experienced an upside  in patient traffic since the second half of the fourth quarter, any hiccup in the recovery process will have a negative impact on the top line.

However, we are confident about the long-term potential of Align and hence maintain our ‘Neutral’ stand.

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