Align Earnings: Crooked Third-Quarter Results Leave Investors Frowning, but We Think Shares Are Cheap

Narrow-moat Align Technology ALGN reported disappointing third-quarter results and, after adjusting our model, we’ve lowered our fair value estimate to $316 per share, down from $338. Total sales were up 7.8% year over year, but difficult macroeconomic conditions and weaker consumer sentiment weighed down top and bottom line, both of which missed consensus. Dynamic conditions driven by lower demand, especially from adult patients, loomed over the firm during the quarter and we expect this concern to continue throughout the year. Management, citing reports of deceleration for orthodontic treatment for September, trimmed full-year sales guidance roughly 4% and expects lower operating margin compared with last year.

Clear aligner sales were up 8.5% driven by a low-single-digit shipment increase and a mid-single-digit climb in average sales per case. While the year-over-year comparison looks somewhat healthy, the sequential top-line slump paints a clearer picture of declining case starts and lower office visits. While seasonality certainly factors in when comparing results on a quarter-to-quarter basis, we still see more pronounced softness in this quarter’s results compared with historical levels. One bit of positive news that comes from these earnings is that Align continues to increase shipments to teen and young patients, which were up 8.4% year over year and 10% sequentially. We reiterate the importance of the teen market because, out of roughly 22 million annual orthodontic cases, about three fourths comes from teens, though 75% of Invisalign cases go to adults. Align over the last couple of years has increased its marketing spending to win more shares in the teen market, a space that is predominantly filled with traditional wire and brackets. Invisalign First, Invisalign designed for patients age 6 to 10, continues to post strong growth and this momentum has somewhat offset challenges in the adult market.