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Bull of the Day: Align Technology (ALGN)

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I last wrote about Align Technology (ALGN - Free Report) as the Bull of the Day in mid-June after the stock made new all-time highs above $370. Since then, the stock has been to $385 and the company has delivered another stellar quarterly report.
Here's what I wrote June 19 to describe the opportunity that many investors missed in an exciting business all about greater smiles...
The phenomenal growth story that is Align Technology, makers of the revolutionary Invisalign clear teeth straighteners, continues to make early investors smile while apparently catching the majority by surprise. 
In the past year, ALGN shares are up 155% vs the S&P 500 at +14%. That performance certainly made members of my Healthcare Innovators portfolio smile where we owned the stock from $133 up to $333.
Now trading above $360, with an all-time high close of $370.10 hit on June 18, ALGN shares trade for over 75 times the consensus EPS estimate for this year of $4.73. And that explains why so many passed on boarding this one-way train to big gains.
What the majority missed was that the company's breakthrough dental technologies were going to maintain over 25% growth domestically and nearly 35% growth internationally as more dental professionals found the Invisalign system to be an extremely effective and highly desirable solution for their patients.
The Align Trajectory Continues
On July 25, Align delivered big beats on both the top and bottom lines. Revenues of $490 million topped the Zacks consensus of $469 million by 4.5% and EPS of $1.30 trounced the consensus of $1.09 by 19%.
But the company gave conservative guidance that didn't raise the bar very high for the rest of the year and the stock has sold off back to $350. I think it's a buying opportunity and I will explain why.
First, let's look at what analysts did with estimates after the report to keep ALGN in the upper realms of the Zacks Rank. In the past week, the EPS consensus for the year rose from $4.78 to $4.92. Assuming they actually bring home $5 EPS for the holidays, this puts the P/E back down to 70X at $350.
Driving that 26.5% EPS growth this year is an expected 32% advance on the top line to $1.95 billion.
Full-year EPS estimates for 2019 rose from $6.09 to $6.20, which puts the forward multiple solidly under 60X. And the sales growth rate is not projected to slow down much into next year with current revenue estimates for 2019 of $2.42 billion, representing a 24% advance.
This growth is driven by increasing adoption among US dental professionals who are quickly on their way to the next big milestone of 2 million teens wearing Invisalign products.
It's also about break-neck growth in emerging markets like China and India, and expanded production facilities in Costa Rica, which could be a gateway to Latin American markets (I'm still researching that potential).
Digital Domination with iTero
Now, why would any investor pay 60X for this company's growth? Because the growth is so powerful in (1) expanding markets and (2) with little serious competition.
What many investors don't understand about Align is that the Invisalign clear aligners are created with a digital scan of the patient's mouth to create the precision fit a doctor is looking for.
The scanning technology is called iTero and doctors can actually use it to show patients the outcome of their Invisalign treatment. According to Align data on over 200 thousand cases, this results in 3X faster clinical setups, 10X fewer rejections, 7X fewer fit issues, and an overall better patient experience.
And it was actually iTero sales that drove much of the upside in Q2 results with 60% growth. But the real story is about an expanding market with wider adoption among dental professionals. Here's what Piper Jaffray analyst Matt O'Brien had to say...
"Simply put, clinicians do not buy scanners unless they intend to use a lot of aligners in the future, so we view this as a very positive sign for the company’s outlook." 
O'Brien raised his price target on ALGN to $440 from $425 saying that he continues to view ALGN as "one of the best secular growth stories in all of med tech" and encouraging investors to start or build positions in the name despite the premium valuation.
The analyst has also done extensive research on the competitive landscape and has found them wanting, unable to offer compelling alternatives to the Invisalign system. Plus, when O'Brien looks at the TAM (total addressable market), and less than 10% penetration in the US, he sees Align able to sustain top-tier growth for years.
Price Targets Head North
While the Piper Jaffray analyst captured the high Street target at $440, he was closely followed by other i-banks with optimistic views...
Stifel Nicolaus: $375 to $425
Robert W. Baird: $351 to $425
Leerink Swann: $400 to $420
Jefferies: $350 to $420
Credit Suisse: $340 to $391
Stifel analyst Jonathan Block once held the high Street target on ALGN ($350) back in May following the annual American Association of Orthodontists tradeshow where competing products were seen as limited in the type of malocclusions that can be treated. Plus, many competitive products also lacked supporting case management software for the orthodontist that is critical to the overall process in today's market.
Block now feels that ALGN shares "may consolidate a bit in the near-term, but we believe there are a handful of catalysts / new products teed up in the coming months, which may set up upside to 2019 Street estimates." 
Baird analyst Jeff Johnson noted Align case shipments, revenue, and earnings all exceeded estimates and believed the guidance was also conservative. He expects competitive pressures to remain muted and has increasing confidence in new products and evolving customer channels. 
Back in for the Long Run
I recently sold ALGN shares out of Healthcare Innovators for a gain of nearly 150% because I expected more consolidation under $350. But after reviewing the growth story and potential, we jumped back in under $340.
Align Technology is what I call a "franchise" investment, like Amazon, Facebook, or NVIDIA.
And there is a broader theme here about how bull markets work and why following long-term investors in great businesses in their early growth stages -- for 2-5 years to let the growth materialize -- really pays off. You can learn more about those ideas in this article I wrote recently...
Disclosure: I own ALGN shares for the Zacks Healthcare Innovators portfolio.
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