Align Reverts Back to Neutral - Analyst Blog

By Zacks | July 06, 2012 AAA

Since our "Outperform" recommendation two months back, shares of Align Technology Inc. (ALGN) have increased considerably and are hovering around its 52-week high level. Given its stretched valuation, we expect limited upside potential for the stock at present and hence revert back to "Neutral" recommendation with a target price of $37.00.

Over the past several quarters, Align witnessed positive growth resulted from increased patient visits coupled with growing interest in its core product, Invisalign Clear Aligner. Moreover, over the past few years, Align began introducing enhanced features across the Invisalign system.

These feature enhancements are a collection of clinical innovations designed to address some of the most significant treatment challenges doctors encounter. The company's Invisalign G3 and G4 are working successfully for its class II and class III patients. The company is also witnessing increased confidence among its Orthodontic customers using Invisalign, as a result of the clinical improvements in Invisalign G3 and Invisalign G4.

Moreover, Align expects to maintain the growth momentum in the upcoming quarters, primarily on the back of scanner sales and new opportunities in the digital dentistry and restorative markets. We believe that on the back of its several strategic initiatives, Align will continue to exhibit strong growth momentum.

The improved sales were also attributable to Align's interoperability with Cadent products. Besides, there has been a continued mix shift toward Invisalign Assist, as a result of Align's efforts to expand the use of the product. Moreover, its focus on the international market, especially Europe, China and Japan, is encouraging.

However, we remain concerned about increased expenses leading to margin contraction during the quarter. Additionally, a tough competitive landscape resulted in a continuous decline in the blended prices over the past few quarters. The company faces significant competition from players such as 3M (MMM), Danaher Corporation (DHR) and Dentsply International (XRAY). We also remain concerned about the economic uncertainty as it forces patients to defer the dental procedures, which are elective in nature.

The company retains a Zacks #3 Rank (Hold) in the short term.
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