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Align Downgraded to Underperform

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We recently downgraded medical device company, Align Technology (ALGN - Free Report) , to Underperform based on the company’s dismal third quarter results and disappointing outlook for the fourth quarter.

Estimates for Align Tech, which focuses on the orthodontics market, have been declining ever since it reported preliminary third quarter results in October. Align Tech’s third quarter revenues as well as EPS of $136.5 million and 28 cents missed the Zacks Consensus Estimates of $140 million and 29 cents, respectively. Fourth quarter guidance (revenue of $134.2 - $137.8 million and EPS of 21 - 23 cents) was also disappointing.

Following the release of third quarter results, the Zacks Consensus Estimate for 2012 has gone down 7.4% to $1.13 per share. The Zacks Consensus Estimate for 2013 has also declined significantly (down 11.5% to $1.23 per share). With the Zacks Consensus Estimates for both 2012 and 2013 going down, the company now has a Zacks #4 Rank (Sell).

Cause for Concern

Align Tech recently said that it will be able to achieve just the lower end of its previously issued fourth quarter guidance. Continued weakness in the global economy that resulted in a challenging environment for dental technology sales is expected to impact fourth quarter results. Moreover, Hurricane Sandy led to significant sales disruptions, affecting Align Tech’s customer practices.

On top of this, a series of bad news like the termination of two distribution agreements and higher management quitting the company also add to our concern. Given the third quarter performance and the challenging outlook, we fail to see any significant catalyst that could drive the shares in the near term. Gross margins will also remain under pressure.

With the company saying that it may only be able to achieve the lower end of its fourth quarter guidance, the Zacks Consensus Estimate for the fourth quarter has gone down 25.8% to 23 cents. Chances remain that fourth quarter results could lag expectations by 4.35%.

Med-Tech Stocks That Warrant a Look

While we prefer to avoid Align Tech until we see signs of improvement in the company's performance, other medical device stocks worth a look are Span-America Medical Systems Inc. and Merit Medical Systems, Inc. (MMSI - Free Report) . Both are Zacks #1 Rank (Strong Buy) stocks.

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Align Technology, Inc. (ALGN) - free report >>

Merit Medical Systems, Inc. (MMSI) - free report >>

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