Tuesday, April 06, 2010

Align Technology (NASDAQ:ALGN): Downgraded to Sell from Buy at Northcoast; target lowered to $13 (!)

Northcoast Research is out with a very negative call on Align Technology (NASDAQ:ALGN) downgrading the name to a Sell from Buy and lowering their price target to $13 (prev. $21)

Firm notes they believe ALGN’s proficiency program will transition from a revenue growth tailwind to a headwind beginning July 1, 2010. During the past several quarters, firm's research indicates ALGN’s revenue has benefited from doctors actively working to achieve proficiency status. In total, they believe this
one-time benefit has added 5-10 percentage points to ALGN’s North American case start growth rate.

In 2H10-1H11 (second-half FY10-first-half FY11), ALGN will compare against these inflated results and they believe growth will slow as a result. Later this year, doctors will simply not have the same incentive to aggressively grow their Invisalign cases (in some cases by 2x-4x) to maintain active status. Separately, many doctors are upset by ALGN’s proficiency requirements and will simply discontinue using Invisalign.

Even more concerning, Northcoast's research indicates that the GAC division of Dentsply (XRAY) will soon enter the market with a new clear aligner product. While there is no public data available on the new GAC product at this point, they believe it will be a multi-aligner system (10+) that will initially be able to treat about 50% of Invisalign cases at a retail price of $700, or a 55% discount to ALGN’s Invisalign Full.

Firm notes they already have a solid case study to suggest what could happen in the clear aligner market when a formidable competitor enters the market with a considerably less expensive product. Privately-held OrthoClear’s market share increased from 2.5% in 2Q05 to approximately 23% in 3Q06. If XRAY’s new clear aligner product can achieve the same level of market penetration as OrthoClear did in its first six quarters on the market, they estimate it would reduce ALGN’s 2H10 EPS by $0.01 and 2011 EPS by $0.09 due to unit share erosion alone. Firm estimates additional margin compression and lower Invisalign ASP’s could increase ALGN’s EPS risk to $0.18 in FY11.

Finally, they believe recent changes to the Invisalign Teen promotion will expose the adult cases that were causing strong teen procedure growth. Later in the year, the firm believes Invisalign Teen growth rates will slow significantly as doctors that were using the teen product on adult cases transition back to the traditional Invisalign.

Notablecalls: This is one fine piece of research from Northcoast Research's team. They are highlighting several possible (and real) headwinds, some of that are likely to materialize in the next 6 months.

The dental space, as many of you know has gotten hit particularly hard during the recession, yet ALGN stock is up quite nicely over the past couple of years.

There is no short interest to speak of which shows the negative side of the story is yet to be known.

I suspect ALGN will get hit as the call circulates around trading desks today and in the coming days.

Note that Northcoast has put real work into this, as the call is 24 pages long.


PS: This may be the first time I have highlighted Northcoast Research here, so welcome aboard!

418 comments:

1 – 200 of 418   Newer›   Newest»
rrtzmd said...

...WTF are they talking about?...orthoclear?...is it still in business?...as I recall Align won a lawsuit against them 4 years ago that effectively locked them out of the US market...I presume they're talking about XRAY's "mystique" system...but that is just a translucent brace system not at all like invisalign...and if they're talking about the "in-ovation" system, that's just another wire system...it doesn't look like particularly good research to me...

rrtzmd said...

...I forgot to add that there are other products similar to invisalign -- nubrace, "red, white, and blue," "simpli5", clear correct...these are typically marketed to general dentists and have proven to be no competition to invisalign whatsoever...invisalign is an 800 pound gorilla...all the others are just fleas...

notablecalls said...

I presume you're long.

rrtzmd said...

...you betcha...and I also like to poke holes in what I see as specious commentary...

notablecalls said...

thanks for the comments. Appreciate.

rrtzmd said...

...well, at least one guy corrected this nonsense:

http://seekingalpha.com/article/197319-align-technologies-takes-one-in-the-teeth

......I'm really impressed that this guy took the time to finally check out the details...I think this is either a four plus year old report that someone is recirculating or else someone purposely put out a false story to try and manipulate the market...I'm going to go ahead and contact the SEC about this...

rrtzmd said...

...I emailed Ed Snyder at Northcoast Research to see if this actually came from his office...he covers ALGN for them...he called me back almost immediately and confirmed it but said he was misquoted about Orthoclear...his main point was that he believed GAC will introduce a new product that will take market share away from ALGN in a manner similar to what Orthoclear did FIVE YEARS AGO...I presume he's talking about "mystique" and GAC's 3D modelling system "orthoplex"...but "mystique" is just a translucent bracing system not at all analagous to invisalign...and invisalign is well protected by patents...as I pointed out in my other posts, there are other companies that market invisalign "wannabees" but ALGN ignores them since they represent no real competition...I still think ALGN is the 800 pound gorilla...a simple solution may be to buy XRAY as well...

notablecalls said...

Misquoted analyst? How can he misquoted, he wrote the report. And I think it is a damn fine piece of research. Wish there were more like it.

ALGN mkt cap 1.3 bln
XRAY mkt cap 5.1 bln

XRAYs the 800lbs gorilla in the space.

The stock is expensive and it looks like there will be headwinds. A lucrative niche always attracts competition eventually and if its a one product company, it spells trouble.

I would not be surprised to see addnl sell interest in the name as PMs read the Northcoast call and decide to book some profits.

Nothing personal but you seem to be long a ton of ALGN to be so aggitated by this downgrade.

I did however like the way you fought back, contacted the analyst etc.

In the end its all a big game, right?

Right?

Unknown said...

I would believe that the posting is pretty accurate. Dentsply has been in the aligner game longer than anyone through their Raintree Essix division. The basically invented it. The thermoforming plastic used by Invisalign's only decent competitor to date, OrthoClear, was even made by Dentsply. Seems like a logical next step, no?

bl said...

Needless to say the stock tanked!
Who can argue with that.

rrtzmd said...

...currently, at least, XRAY has nothing that compares with invisalign...MAYBE some new product is going to be released per the analyst's report...when I see it, then maybe I'll believe it...however, invisalign ALREADY has plenty of similar competitors:
nubrace, "red, white, and blue," "simpli5", clear correct...these have not proven to be competition to invisalign despite various claims of superiority and lower cost...I'm not sure what inside information the analyst is privy to...however, if none of the current competitors have made a dent in invisalign's market, then I have to wonder what is so special about about XRAY's product...in addition, continuing improvements in lingual orthodontics have made them competitors as well...I find it odd that XRAY would wade into a market already crowded with competitors...plus they would be cannibalizing on their already established orthodontic products...I like ALGN because they do one thing and they do it very well...almost $3 a share in cash...no debt...new foreign distributor...I like the way they control their operating costs...last four analysts all had favorable reports and buy recommendations: Brigantine, Barrington Research, Sun Trust, Rbinson Humphrey, and Brean Murray...maybe Northcoast Research possesses insight no one else has...we'll see...

bl said...

Everybody has an opinion except the chart...it's fact! That's why I don't listen to what people say as truth...it' their(a chart's) action. I put it down as an idea but anything can happen with so many market participants. Fundamentals change, opinions change reflected in the charts. What do I know/information about a company ...2%? MON nice volatility Wed.

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