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Align Remains Neutral

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Recently, we have reiterated our Neutral recommendation on Align Technology (ALGN) with a target price of $27.00. The company witnessed balanced sales growth across all its channels during the fourth quarter of fiscal 2011.

In the fourth quarter of 2011, Align’s adjusted EPS was 28 cents, beating the Zacks Consensus Estimate of 22 cents and ahead of the year-ago quarter’s adjusted EPS of 14 cents. Reported EPS also surpassed the company’s guidance range of 20−22 cents.

The positive growth resulted from increased patient visits coupled with growing interest in high-value procedures like Invisalign Full. Besides, there has been a continued mix shift toward Invisalign Assist, resulting from Align’s efforts to expand the use of the product.

Align has undertaken several strategies to improve the adoption rate of Invisalign. These include acceleration of product/technology development, extension of clinical effectiveness, expansion of the Invisalign brand and driving international growth.

Moreover, Align expects to maintain the growth momentum in the upcoming quarters, primarily attributable to scanner sales and new opportunities in the digital dentistry and restorative markets. Align’s revenue in the fourth quarter includes contribution from the Cadent Holdings, which it acquired in April 2011.

The improved sales were also attributable to Align’s interoperability with Cadent products. Jointly with Cadent, the company expects to deliver a series of applications over the next couple of years.

We believe that based on its several strategic initiatives, Align will continue to exhibit strong growth momentum. The company considers Invisalign G3 to be the key driving force behind its continuous penetration in Ortho practices at a faster rate compared to the overall market, a trend expected to persist with the launch of Invisalign G4. 

However, we remain concerned regarding Align’s significant margin compression in the fourth quarter of 2011. The company’s continuous strategic investments in the international market, portfolio expansion, the full quarter's effect from sales force addition for North American scanner sales, the implementation of marketing programs in both North America and in the international markets and expenses incurred for the commercialization of Invisalign G4 resulted in higher operating cost.   

We remain apprehensive based on the economic uncertainty as it makes patient defer dental procedures, being elective in nature. Widespread austerity measures in both public and private sectors led to softer performance in the UK. Align currently retains a Zacks #3 Rank (short-term Hold rating). With respect to competition, Align ranks at par with its peer Danaher Corporation (DHR), which also holds a Zacks #3 Rank (short-term Hold).

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