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Align (ALGN) Gains From Increased Case Shipment Amid FX Woes

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Align Technology's (ALGN - Free Report) robust product line and improving Invisalign case shipmentsincrease our confidence in the stock. Yet, escalating expenses and stiff competition raise apprehension. Align Technology currently carries a Zacks Rank #3 (Hold).

On a positive note, Align Technology registered robust revenue growth in the first quarter of 2022 despite a challenging business environment. The top line was driven by strong performances across the Clear Aligner and Imaging Systems & CAD/CAM Services segments. The increased Invisalign case shipments during the reported quarter look impressive. Within the teen segment, 175,000 teens began treatment with Invisalign aligners, indicating an increase of 6% year over year. For the first quarter, Dental Service Organizations (DSO) practices grew faster compared to non-DSO practices, with increased utilization led by Heartland and Smile Doctors.

The company’s systems and services revenues recorded impressive revenues in the first quarter on strong scanner shipments and services. Total worldwide intraoral digital scans submitted to start an Invisalign case increased to 87.1% on a year-over-year basis. The growing market adoption of the iTero Element 5D Plus imaging systems appears promising.

Additionally, the company’s focus on expanding its global operations, both in existing and emerging international markets, and increasing orthodontic adoption and utilization of Invisalign Treatment, especially with teens, raise optimism.

During the first quarter, the company continued to make efforts to educate consumers about the Invisalign system. The company continued to build on its successful "Invis is" multimedia campaign across the Americas, EMEA and APAC. The company also built upon its successful "Invis is a Powerful Thing" campaign to expand its young adult business across the Americas, EMEA and APAC.

In addition, Align Technology launched a pilot in the United Kingdom to reach out to teenagers with special campaigns. The company also strengthened investments in Australia to extend its reach with the help of social media platforms like TikTok, Meta and YouTube. These consumer marketing initiatives are expected to broaden the company’s customer base globally.

On the flip side, Align Technology’s first-quarter earnings and revenues missed the Zacks Consensus Estimate. The year-over-year decline in EPS does not bode well. The contraction of both margins is worrisome. During the first quarter, Align Technology witnessed a 10.7% year-over-year increase in selling, general and administrative expenses and a 31.7% rise in research and development expenses. These escalating expenses resulted in a 484-basis point contraction in operation margin, building pressure on the bottom line.

During the first quarter, clear aligners revenues were down 0.7% on a sequential basis due to lower Invisalign case volumes. Americas case volumes declined 4.3% sequentially, attributable to the impact of the COVID-19 waves in North America and Latin America, which led to customer staffing shortages and practice closures, as well as a decline in patient traffic and increased appointment cancellations.  International case volumes were down 6.1% sequentially, owing to the impact of COVID-19 restrictions and lockdowns in China, the ongoing military conflict in Ukraine, inflationary pressure, and other macroeconomic headwinds.

In addition, Align Technology faces significant competition from traditional orthodontic appliance (or wires and brackets) players such as 3M’s Unitek, Danaher Corporation’s Sybron Dental Specialties and Dentsply International. The company also competes with products similar to Invisalign Technology, such as products from Ormco Orthodontics, a division of Sybron Dental Specialties.

Further, during the first quarter, Align Technology’s clear aligner revenues were unfavorably impacted by foreign exchange of nearly $24 million or almost 3.2 points on a year-over-year basis. The company, on its first-quarter earnings call, noted that unfavorable foreign exchange rates have been negatively impacting revenues, margins and EPS, as it conducts nearly half its business outside the United States.

Align Technology has been underperforming its industry in the past year. The stock has lost 59.2% compared with the industry's 9% decline.

Key Picks

A few better-ranked stocks in the broader medical space that investors can consider are AMN Healthcare Services, Inc. (AMN - Free Report) , Novo Nordisk (NVO - Free Report) and Masimo Corporation (MASI - Free Report) .

AMN Healthcare has a long-term earnings growth rate of 1.1%. The company surpassed earnings estimates in the trailing four quarters, delivering a surprise of 15.6%, on average. It currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

AMN Healthcare has outperformed its industry in the past year. AMN has gained 18.2% against the industry’s 50.8% fall.

Novo Nordisk has a long-term earnings growth rate of 14.5%. The company surpassed earnings estimates in the trailing four quarters, delivering a surprise of 7.6%, on average. It currently carries a Zacks Rank #2 (Buy).

Novo Nordisk has outperformed its industry in the past year. NVO has gained 31.2% against the industry’s 19.3% growth.

Masimo has a historical earnings growth rate of 15.1%. Masimo’s earnings surpassed estimates in the trailing four quarters, the average surprise being 4.4%. It currently carries a Zacks Rank #2.

Masimo has underperformed its industry in the past year. MASI has declined 44.2% compared with the industry’s 25.6% plunge.