ALGN Stock Study (5-11-23)

I recently did a stock study on Align Technology Inc. (ALGN) with a closing price of $305.26.

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.

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, over the last 10 years. Lines are mostly up, straight, and parallel except for a spike in ’20 EPS and ’22 EPS, which drops off considerably. PTPM has mostly led the industry while falling behind peers in ’19 with a last-5-year average of 20.8%.

ROE leads peer and industry averages with a last-5-year average (excluding ’20) of 24.4%. The same holds for Debt-to-Capital with a last-5-year average 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.

I forecast long-term annualized sales growth of 6% based on the following:

• CNN Business reports ACE of 8.1% YOY and 9.0% per year for ’23 and ’22-’24, respectively (based on 10 analysts).
• YF projects YOY 5.5% and 11.5% for ’23 and ’24, respectively (12 analysts).
• Zacks projects YOY 3.8% and 10.9% for ’23 and ’24, respectively (6).
• Value Line projects 13.7% annualized growth from ’22-’27.
• CFRA projects 2.0% YOY and 7.4% per year for ’23 and ’22-’24, respectively.
• M* offers a 2-year annualized ACE of 6.4%.

I am forecasting conservatively.

I forecast long-term annualized EPS growth of 10% based on the following:

• CNN Business reports ACE of 6.8% YOY and 13.3% per year for ’23 and ’22-’24, respectively (based on 10 analysts), along with 5-year annualized growth of 17.2%.
• MarketWatch projects 19.0% and 19.1% per year from ’22-’24 and ’22-’25, respectively (13 analysts).
• Nasdaq.com projects 20.7% and 22.4% annualized growth from ’23 (6) to ’24 (6) and ’25 (2), respectively.
• Seeking Alpha projects 4-year annualized growth of 17.8%.
• YF projects YOY 7.1% and 19.9% for ’23 and ’24, respectively (11), along with 5-year annualized growth of 43.3%.
• Zacks projects YOY 6.3% and 18.8% for ’23 and ’24, respectively (7), along with 5-year annualized growth of 17.2%.
• Value Line projects 18.2% annualized growth from ’22-’27.
• CFRA projects 10.9% YOY and 16.1% per year for ’23 and ’22-’24, respectively, but NMF as a 3-year CAGR.
• M* has long-term ACE at 14.8% per year.

As CFRA recuses itself from that longer-term estimate, I believe YF’s long-term estimate to also be NMF as an extreme outlier. I am forecasting conservatively below the long-term-estimate range (mean of five: 17.0%).

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 (d52.4%). Value Line, however, shows a drop from $9.79/share in ’21 to $7.22/share in ’22 (d26.3%) without footnoting any nonrecurring losses. CFRA shows a drop in normalized EPS from $11.22/share in ’21 to $7.76/share in ’22 (d30.8%) without giving any explanation as to what is being omitted.

And suddenly, YF’s 43.3% doesn’t look so outrageous if done from ’23 Q1 EPS ($4.05/share annualized) because $24.47 in ’27 is about even with the extrapolated trendline (with ’20 EPS of $22.41/share excluded).

For lack of any better idea and a need to maintain a minimum high EPS for a valid study, I am forecasting 10% EPS growth. As mentioned above, this is below the long-term-estimate range. I will project from the trendline, however, rather than the last quarterly or annual EPS. Furthermore, I will exclude ’21 EPS. This lowers the ’22 trendline from $8.69/share to $7.37/share.

My Forecast High P/E is 30. Over the last 10 years, high P/E ranges from 24.3 (’20) to 142 (upside outlier in ’22) with a last-5-year average of 60.5. Excluding ’20 as a downside outlier, the next-lowest value is 36.8 (’14). I am forecasting conservatively.

My Forecast Low P/E is 24. Over the last 10 years, low P/E ranges from 5.7 in ’20 to 51 in ’21. I would exclude both as outliers. The last-5-year average is then 35.5. The second-lowest P/E is 24.4 in ’14. I am forecasting just below the latter.

My Low Stock Price Forecast (LSPF) is $176.90. Zero growth is assumed beyond the $7.37/share derived above. This is 42.0% below the previous close and 2.8% above the 52-week low.

These inputs land ALGN in the HOLD zone with an U/D ratio of 0.9. Total Annualized Return (TAR) is 7.0%.

PAR (using Forecast Average—not High—P/E) is 3.1%, which is less than the current risk-free rate. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on the 7.0% instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 132 studies done in the past 90 days (my study along with 29 outliers excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, and Forecast Low P/E, are 13.3%, 15.0%, 47.9, and 28.7. Despite being lower on all 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 (38.3) and lower than mine (30.0). The former is ~50% greater than Value Line, which makes me wonder if other studies were as confused about this company as I am.

With regard to other data, MS high and low EPS are $8.53/share and $4.55/share in contrast to my $11.87 and $7.37. MS LSPF of $141.90 implies a Forecast Low P/E of 31.2 (versus the above-stated 28.7), is 19.8% less than mine, and is 8.7% greater than the $4.55 * 28.7 = $130.59 default.

At first, this encounter with ALGN was much easier than my original 11/8/22 stock study because the negative analyst forecasts have now turned positive thereby facilitating the math. Ultimately though, this study proved to be every bit as much of a challenge due to confusion about what different sources are excluding and why.

The stock has rallied 77.4% from [what is currently] the 52-week low. I wouldn’t expect any stock that has rallied this much to be near the BUY zone, and this certainly is not. I would look to re-evaluate under $240/share.