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Align Technology (ALGN) Up 16% Since Last Earnings Report: Can It Continue?

Zacks Equity Research
·4-min read

A month has gone by since the last earnings report for Align Technology (ALGN). Shares have added about 16% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Align Technology due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Align Technology Earnings Miss in Q1, Margins Dip

Align Technology first-quarter 2020 earnings per share (EPS) were 73 cents, reflecting a 41.6% decline from the year-ago period. The figure lagged the Zacks Consensus Estimate by a huge margin of 31.8%. The significantly lower-than-expected revenues of Invisalign clear aligners and iTero scanners during the first quarter due to the COVID-19 pandemic outbreak resulted in such a lackluster bottom line.

Revenues edged up 0.4% year over year to $550.9 million in the quarter but missed the Zacks Consensus Estimate by 6.3%.

Segments in Detail

In the first quarter, revenues at the Clear Aligner segment rose 2.6% year over year to $481.6 million. Within the segment, Invisalign case shipments amounted to 359.4 thousand, up 2.9% year over year.

Despite the COVID-19 impact on sales, the company noted solid growth from non-comprehensive products driven by the Invisalign Go system and Invisalign Moderate across all regions. This was offset by a lower mix of comprehensive products primarily due to the shortfall in China.

During the quarter, Invisalign volumes were up 5.2% and down 0.2% year over year in the Americas and International regions, respectively. Invisalign volume for teenage patients was 104,000 cases, up 6.8% year over year.

Revenues from Scanner and Services declined 13.1% to $69.4 million in the quarterdue to COVID-19-led lower sales in North America and APAC region, despite increase in revenues in EMEA and Latin America.

Margins

Gross margin in the quarter under review contracted 167 basis points (bps) year over year to 71.6% on a 6.6% rise in cost of net revenues.

During the quarter, Align Technology witnessed a 14.5% year-over-year increase in selling, general and administrative expenses to $282.9 million and a 10.7% rise in research and development expenses to $41.5 million. Operating margin contracted 871 bps to 12.7% in the quarter under review.

Financial Details

At the end of the first quarter, Align Technology had cash, cash equivalents and short-term marketable securities of $790.1 million, compared with $868.6 million at the end of 2019.

Net cash provided by operating activities was $9.8 million in the first quarter, compared with $117.2 million in the year-ago period.
The company currently has approximately $100 million left under its May 2018 repurchase program.

Guidance Update

The uncertainties regarding the duration and impact of the coronavirus pandemic on the company’s overall business have compelled Align Technologies to suspend its previously-issued 2020 financial guidance.

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How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -111.24% due to these changes.

VGM Scores

At this time, Align Technology has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. Following the exact same course, the stock was allocated a grade of F on the value side, putting it in the fifth quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Align Technology has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.


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