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Align Technology: Top Line Strong, Product Mix Hurts Margin

BAX ALGN GWPH BVX

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On Nov 10, 2016, we issued an updated research report on California-based Align Technology Inc. (ALGN - Free Report) , a developer of aligner therapy, intra-oral scanners and CAD/CAM (computer-aided design and computer-aided manufacturing) digital services.

Align ended the third quarter of 2016 on a promising note, with its earnings and revenues squarely beating the Zacks Consensus Estimate. We are particularly upbeat about the continued strong Invisalign volumes registered by the company. We are also looking forward to the latest breakthrough by Align, termed as Invisalign G7, which is successfully working to tap the huge and growing teen orthodontic market.

Management observed strong demand for Align’s new iTero Element scanner, which delivered record shipments in the third quarter, resulting in scanner revenue growth of almost 274% year over year.

Geographically, the company was successful in delivering double-digit sales growth in North America as well as overseas. Particularly in North America, the company observed continued increase in utilization among its orthodontist customers. In EMEA, continued adoption of Invisalign was noted in core markets like Spain and France along with rapid growth from expansion into new country markets including Eastern Europe, Benelux, and Nordic regions. In the Asia-Pacific, Align witnessed strong volumes in China and Japan.

However, gross margin contraction due to rising costs and unfavorable product mix added to our woes. Also, continued exposure to exchange rate fluctuations owing to the company’s extensive overseas business, poses a serious concern in the near term. In fact, Align is worried that exchange rate fluctuations might harm its business in the near future.

We are concerned about the ongoing economic uncertainty as well, which casts a shadow on Align’s dental procedures. Additionally, the competitive landscape remains an overhang.

Zacks Rank & Key Picks

Currently, Align carries a Zacks Rank #2 (Buy). Some other well-ranked medical stocks are GW Pharmaceuticals plc (GWPH - Free Report) , Baxter International Inc. (BAX - Free Report) and Bovie Medical Corporation (BVX - Free Report) . GW Pharmaceuticals and Baxter sport a Zacks Rank #1 (Strong Buy) while Bovie Medical carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

GW Pharmaceuticals surged 88.6% year to date compared to the S&P 500’s 5.9% over the same period. The company has a four-quarter average positive earnings surprise of 41.7%.

Baxter international rallied 24.6% in the past one year, which compares favorably with the S&P 500’s 6.9%. It has a trailing four-quarter average positive earnings surprise of 27%.

Bovie Medical recorded a 103.6% gain in the past one year. The company has a trailing four-quarter average positive earnings surprise of 28.7%.

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