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ALGN Stock Study (8-7-23)

Posted by on October 19, 2023 at 06:29 | Last modified: August 7, 2023 15:43

I recently did a stock study on Align Technology Inc. (ALGN) with a closing price of $361.44. The previous study is here.

CFRA writes:

     > Align Technology, Inc. (ALGN) is a global medical device company
     > engaged in the design, manufacture, and marketing of Invisalign
     > clear aligners and iTero intraoral scanners and services for
     > orthodontics, and restorative and aesthetic dentistry. ALGN
     > also provides exocad computer-aided design and computer-aided
     > manufacturing (“CAD/CAM”) software for dental laboratories and
     > dental practitioners. ALGN’s products are intended primarily
     > for the treatment of malocclusion or the misalignment of teeth.

Over the past decade, this medium-size company has posted annualized growth of 23.8% and 25.0% for sales and EPS (excluding ’20, which is an upside outlier that boosts the latter growth rate to 30.3%), respectively. Lines are mostly up, straight, and parallel except for a spike in ’20 EPS and ’22 EPS, which drops off considerably. PTPM mostly leads the industry while falling behind peers in ’19 with a last-5-year mean of 20.8%.

Also over the past decade, ROE leads peer and industry averages with a last-5-year mean (excluding ’20) of 24.4%. The same holds for Debt-to-Capital with a last-5-year mean of 2.7% (per Value Line, the company has no long-term debt).

Value Line gives ALGN a Financial Strength rating of B++ and M* a “Standard” rating for Capital Allocation.

With regard to sales growth:

I am forecasting conservatively at 6.0% per year.

With regard to EPS growth:

I am forecasting below the long-term-estimate range [mean of five excluding YF (possible NMF): 16.9%] at 12.0% per year.

An initial value discussion awaits since EPS numbers are discrepant. The ’22 10-K shows a drop from $9.69/share in ’21 to $4.61/share in ’22 (-52.4%). Value Line, however, shows a drop from $9.79/share in ’21 to $7.22/share in ’22 (-26.3%) without footnoting any nonrecurring losses. CFRA shows a drop in normalized EPS from $11.22/share in ’21 to $7.76/share in ’22 (-30.8%) without giving any explanation as to what is being omitted.

For lack of any better idea and a need to maintain a minimum high EPS for a valid study, I am forecasting lower EPS growth (8.0% per year) using the trendline as a higher initial value rather than the last quarterly or annual EPS. Furthermore, I will exclude ’20 and ’21 EPS to lower initial value from $12.08/share to $7.27/share.

My Forecast High P/E is 38.0. Over the past decade, high P/E ranges from 24.3 (in’20) to 142 (upside outlier in ’22) with a last-5-year mean of 60.5. Excluding ’20 as a downside outlier, the next-lowest value is 36.8 in ’14. The last-5-year-mean average P/E is 48.0. I am forecasting conservatively (only ’20 and ’14 are lower).

My Forecast Low P/E is 30.0. Over the past decade, low P/E ranges from 5.7 in ’20 to 51.0 in ’21. I would exclude both as outliers. The last-5-year average is then 35.5 and the last-10-year median is 31.0. I am forecasting just below the latter.

My Low Stock Price Forecast (LSPF) of $218.10 is default based on $7.37/share initial value. This is 39.7% less than the previous close and 26.7% greater than the 52-week low.

These inputs land ALGN in the HOLD zone with a U/D ratio of 0.3. Total Annualized Return (TAR) is 2.6%.

PAR (using Forecast Average–not High–P/E) is 0.4%, which is less than the current yield on T-bills. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on the 2.6% instead. Even this is much too low for me to consider investible, however.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 126 studies done in the past 90 days (my study along with 40 outliers excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, and Forecast Low P/E, are 13.8%, 15.4%, 46.0, and 28.2. Despite being lower on three out of four inputs, my EPS override makes comparison difficult. Value Line projects a future average annual P/E of 26.5, which is much lower than MS (37.1) and lower than mine (34.0).

MS high / low EPS are $9.27 / $4.07 vs. my $10.83 / $7.27 (per share). My numbers must be higher due to the initial value.

MS mean LSPF of $129.90 implies a Forecast Low P/E of 31.9 vs. the above-stated 28.2. MS LSPF is 13.2% greater than the default $4.07/share * 28.2 = $114.77, which results in slightly more aggressive zoning. MS LSPF is a whopping 40.4% less than mine, however. I do believe that to be unreasonably low (but of little consequence).

MS TAR of 5.0% is nearly double mine, which makes me think MOS in the current study is decent.

I track different valuation metrics. PEG is significantly overvalued at 2.4 per Zacks and 10.3 per my projected [forward] P/E. Relative Value [(current P/E) / 5-year-mean average P/E] is significantly overvalued at 1.83. Kim Butcher’s “quick and dirty DCF” prices the stock at 25.0 * [$16.95 – ($0.00 + $2.20)] = $368.75 thereby implying the stock to be 2.0% undervalued.

I would look to re-evaluate this stock under $266/share.

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