ALGN Stock Study (5-8-24)
Posted by Mark on May 24, 2024 at 06:38 | Last modified: May 9, 2024 10:32I recently did a stock study on Align Technology Inc. (ALGN, $286.52). Previous studies are here and 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 last 10 years, this medium-size company has posted annualized growth of 22.3% and 14.7% for sales and EPS (excluding COVID years ’20 and ’21 for the latter: upside outliers that otherwise boost EPS growth rate to 20.6%), respectively. Lines are mostly up, straight, and parallel except for a spike in ’20 EPS and ’22 EPS that drops off considerably.
Over the past decade, PTPM mostly leads peer and industry averages despite trending down from 25.0% (’14) to 16.6% (’23) with a last-5-year mean of 19.4%. ROE leads peer and industry averages despite falling from 19.7% (’14) to 11.7% (’23) with a last-5-year mean (excluding ’20) of 19.1%. Debt-to-Capital is far below peer and industry averages with a last-5-year mean of 3.4% (the company has no long-term debt per Value Line).
Value Line gives ALGN a Financial Strength rating of B++. M* gives a “Standard” rating for Capital Allocation and assigns a “Narrow” economic moat. Quick Ratio is 1.02.
With regard to sales growth:
- YF projects YOY 6.7% and 9.5% for ’24 and ’25, respectively (based on 13 analysts).
- Zacks projects YOY 6.5% and 9.8% for ’24 and ’25, respectively (6 analysts).
- Value Line projects 8.2% annualized growth from ’23-’28.
- CFRA projects 6.6% YOY and 7.0% per year for ’24 and ’23-’25, respectively.
- M* offers a 2-year annualized ACE of 8.0% and projects 13.0% midcycle growth in its analyst note.
I am forecasting below the range at 6.0% per year.
With regard to EPS growth:
- MarketWatch projects 13.2% and 14.7% per year from ’23-’25 and ’23-’26, respectively (based on 16 analysts).
- Nasdaq.com projects 16.3% and 15.2% per year for ’24-’26 and ’24-’27 [6/2/1 analyst(s) for ’24/’26/’27].
- Seeking Alpha projects 4-year annualized growth of 11.7%.
- YF projects YOY 12.1% and 13.8% for ’24 and ’25, respectively (13), along with 5-year annualized growth of 11.7%.
- Zacks projects YOY 12.1% and 13.3% for ’24 and ’25, respectively (7), along with 5-year annualized growth of 6.9%.
- Value Line projects 11.5% annualized growth from ’23-’28.
- CFRA projects 10.8% YOY and 12.3% per year for ’24 and ’23-’25, respectively.
- M* has long-term ACE at 19.1% annualized.
I am forecasting below the long-term-estimate range (mean of five: 12.2%) at 7.0% per year. I will use ’23 EPS of $5.81 as the initial value rather than 2024 Q1 $6.07/share (annualized).
My Forecast High P/E is 43.0. Over the past decade, high P/E ranges from 36.8 in ’14 (excluding 24.3 in ’20) to 81.1 in ’18 (excluding upside outlier of 142 in ’22) with a last-5-year mean of 58.0 and a last-5-year-mean average P/E of 51.0. Albeit above my comfort zone, my forecast would be the lowest since ’16 (43.8).
My Forecast Low P/E is 30.0. Over the past decade, low P/E ranges from 24.4 in ’14 (excluding 5.7 in ’20) to 38.3 in ’18 (excluding 51.0 in ’21) with a last-5-year average of 32.8. My forecast would be the lowest since ’16 [24.6 (excluding ’20)].
My Low Stock Price Forecast (LSPF) is $200.50. Default based on $5.81/share would be $174.30: 39.2% less than previous close and 1.1% less than the 52-week low. Because this seems unreasonably low, I will discount previous close by 30.0%.
These inputs land ALGN in the HOLD zone with a U/D ratio of 0.7. Total Annualized Return (TAR) is 4.1%.
PAR (using Forecast Average—not High—P/E) of 0.7% 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 TAR instead (still much lower than I seek for a medium-size company).
To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 47 studies done in the past 90 days (my study and 17 other outliers excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, and Forecast Low P/E are 7.8%, 16.5%, 49.0, and 28.1, respectively. I am lower on all but the latter. Value Line projects a future average annual P/E of 26.5 that is much lower than MS (38.6) and mine (36.5).
MS high / low EPS are $12.92 / $5.82 versus my $8.15 / $5.81 (per share). My high EPS is lower due to a lower growth rate. Value Line’s high EPS of $14.85 is much greater than both (thereby offsetting the 26.5 from above).
MS LSPF of $169.90 implies a Forecast Low P/E of 29.2 versus the above-stated 28.1. MS LSPF is 4.1% greater than the default $5.81/share x 28.1 = $163.26 resulting in more aggressive zoning. MS LSPF is 15.3% less than mine, however.
TAR (over 15.0% preferred) is much less than MS 15.3%. I believe MOS to be robust in the current study.
With regard to valuation, PEG is 4.3 and 6.3 per Zacks and my projected P/E, respectively: significantly overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] is slightly undervalued at 0.93.
This stock is up almost 48% in the last six months. Its longer-term appreciation potential has fallen accordingly. If not for its continued growth prospects, I would SELL.
ALGN is a BUY under $238/share. With a forecast high price ~$350, my personal TAR criterion will be satisfied ~$175.
Full disclaimer: I currently own shares of ALGN.
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