If you’ve ever had braces (or are thinking of getting them), you may have heard of Invisalign. These are a relatively new form of braces that are “virtually invisible” and promises significantly lesser hassle than the traditional forms of metal or ceramic braces.
Align Technology (ALGN) is the company behind that brand, and it produces, markets and franchises the Invisalign system to dental and ortho offices worldwide.
I got to know about Align Technology when I was researching on getting braces two years ago. I had researched thoroughly the various ortho options – and had settled on Invisalign (because of the numerous benefits, branding and success stories shown), even though the quoted price was 3 TIMES more expensive than traditional braces.
Over these 2 years, I had personally experienced the Invisalign process and am convinced that no competitor can match up to the standards that Align has set for itself and of its practitioners.
Align operates through 2 segments – Clear Aligners (which makes up 90% of revenue) and Scanners & Services.
A Strong, Sustainable Moat That Has Lasted Since 14 Years Ago
The beauty of Align Tech is that it had been arguably the first to come up with such disruptive innovation in the ortho space some 14 years ago, and over the years, have been successful in building trust and a high-value image to its Invisalign portfolio.
This is so much so that whenever people mention “clear braces”, they first think of “Invisalign”. The mindshare of such a brand connection is intangibly invaluable.
This is so much so that competitors have tried to rival Align in the clear aligner space, but have ALL failed to equally compete with Align thus far – which brings me to my next two competitive advantages – patents and data analytics.
Align has a myriad of patents for its Invisalign dental/medical appliances and has recently had a clear success (pun intended) in April in securing those patents as their own.
Competitors which have sprung up over the last few years include SmileDirectClub, Zenyum (Singapore), Candid Co, YourSmileDirect and Orthly. More competitors are expected to pop up, including those backed by 3M, Danaher, and Dentsply Sirona.
However, Align has published guidance as to why there is no need for investors to worry, stating “As competition comes in, they’ll help to legitimize the marketplace even more”
“They’ll basically have to come in with technology that’s about 10 years behind us.”Joe Hogan, Align CEO
In David and Tom Gardner’s book, Rule Breakers Rule Makers, Align Technology has now transitioned from a Rule Breaker into a Rule Maker, with Align making all the rules and competitors trying to follow (or get eaten up!).
This is a very powerful position to be in.
Moreover, because Align has been doing this for so long, it has inevitably come up with lots of customer data which they can use to analyze and make improvements on each step of the supply chain or customer onboarding process. This is a distinct feature that new entrants CANNOT take away from Align Technology. Align simply has a huge amount of data to serve customers better than the competition.
Such positioning can be seen in their financials:
Align has consistently earned 70+% in Gross Margins and close to 20% Net Profit Margin over the last 5 years, indicating the pricing power Align has due to its brand and leading market position.
Laser-Focused Management Does Not Rest On Its Laurels
Management quality is something not many analysts look at (because of its intangibility) – however, it is an increasingly important part of any analysis, and good research analysts will have taken this into consideration.
In a med-tech company like Align, the most competent management will have solid, longstanding background in scientific research or medical fields – and we duly see this in Align’s core management team. Chairman Raymond Larkin has been holding key positions in the medical space since 1976, growing respiratory patient care equipment sales for his previous company, Nellcor, to nearly $1b in revenues in his peak. The CEO, Joe Hogan, had experience in the medical, technology and industrial automation segments before Align. Prior to joining Align, Mr. Hogan drove 25% of sales as CEO of ABB (power & automation tech company in Switzerland), and more than doubled revenues as CEO of GE Healthcare.
Okay, let’s get to the hard numbers and address the question – are Align’s managers efficient capital allocators and are they working in the interests of their shareholders or themselves?
According to their financials, Align charts up ZERO long-term debt. That is usually a good sign – this means the company is efficiently generating profits and cashflow so much so that they do not have to rely on long-term financing. This is also evident in the graph below showing positive, stable Free Cash Flows, and increasing ROE, ROA and Returns on Invested Capital.
So far, financials have been pretty dandy. However, we want to make sure management doesn’t get complacent and keeps innovating to fend off competition. We can see signs of this in their increased spending in Capital Expenditures and R&D, and a commensurate increase in sales growth.
Now that we’ve seen management’s competencies in growing value, we want to see whether they act in the interests of minority shareholders, rather than in their personal short-term interests. One way to do that is to look at their executive compensation breakdown in their 10-K.
Align has done remarkably in emphasizing their commitment to long-term shareholder interests. In recent years, they have also incentivized C-level management by issuing a Special Equity Award pegged to 3-Year Total Shareholder Returns (TSR), which shows this alignment in interests.
Furthermore, Align has also been aggressive with share buybacks – 1.3% to be exact in 2018, three times the equity burn of 0.4%.
New Markets & Customer Segments
Align had found success in the US and has branching out to other regions in the last few years. One of its key growth areas is in Asia – specifically China and India. It has put manufacturing and ortho training facilities within these countries and is due to capture the large, untapped market with its proprietary Invisalign systems.
Moreover, Align is looking into new customer segments to produce growth. It recently launched its “Invisalign Teen” campaigns marketed to parents and young adults, with reduced prices and complementary trackers and replacements, to entice this demographic to consider Invisalign treatments.
New & Improved Innovations
Secondly, Align is also banking on new innovation and developments through its R&D. It recently launched Invisalign Go, to treat milder cases of tooth misalignment in 2018. It had also launched its improved iTero Element 2 and Flex scanners, promising faster scan times, fuller color and imaging for orthodontists.
Considering that Align is a high-growth stock, I would be incorrect to use DCF to value Align as it will dramatically spit out an Intrinsic Value that does not accurately price in the dynamism for growth. Thus, I opted for using EV/EBITDA.
As shown in the chart above, we see that EV/EBITDA multiples have been coming down from a height of ~70x at 2014 and 2015. This could indicate that investor hype and over-optimism is slowly coming down to reflect fundamental values of the company.
Align Technology is a wonderful company with classic-textbook financials in its reign. It boasts sustainable competitive advantages such as multiple patents, brand name stickiness, market leadership and has a leg up on its data collection. Moreover, it’s flushed with cash and aggressively pursues growth in new area and customer segments, while keeping its dominance with constant R&D spending. I am convinced that the runway for growth is still far and a long ways ahead for Align – and its share prices are beginning to reflect the fundamental values rather than investor optimism. Nevertheless, a good level of margin of safety should be applied if you’re considering buying ALGN!