Elective dental care took a backseat with the onset of the coronavirus pandemic this year as patients began deferring non-essential orthodontic procedures for fear of contracting the virus. Consequently, the businesses of Align Technology, Inc. (ALGN) and SmileDirectClub Inc. (SDC), two of the world's prominent innovative 3-D printed teeth aligner manufacturing companies, have been significantly affected.
ALGN is a medical device company that manufactures and markets the Invisalign clear aligners system, an invisible teeth aligner, iTero intraoral scanners and services for orthodontists and general practitioner dentists, and restorative and aesthetic dentistry in the United States and internationally. ALGN has served more than 9 million patients worldwide with the Invisalign system and reached its one millionth Invisalign patient milestone in the Asia-pacific region in August this year. It operates primarily via two segments – Clear Aligner, and Scanners and Services.
SDC operates a teledentistry platform, SmileCheck, that provides customized clear aligner therapy treatment in the United States and internationally. The company manages the end-to-end process, which include marketing, aligner manufacturing, fulfillment, treatment by a doctor, and monitoring through completion of their proprietary treatment with a network of 250 state licensed orthodontists and general dentists.
Both the stocks have generated decent returns over the past year. While ALGN has returned 90% over this period, SDC gained 59.5%. In terms of year-to-date performance, ALGN is a clear winner with 89.2% returns versus SDC’s 53.7%.
But which of these stocks is a better pick now? Let's find out.
Latest Movements
ALGN launched Invisalign G8 with SmartForce Aligner Activation, the latest of the company’s biomechanics innovations, in October. It allows clear aligners to optimize tooth movements and further improve predictability. Also in October, the company also announced the commercial availability of its previously announced proprietary ClinCheck treatment planning software that showcases digital treatment techniques and featured practitioners from across the Asia Pacific region.
Earlier this month, SDC secured a second patent from the United States Patent & Trademark Office (USPTO) for its SmileShop retail concept and digital methodology for the delivery of clear aligner treatment to consumers. The company has been on an expansion drive lately, partnering with dental support organizations like Platinum Dental Services, Altius Healthcare Management and Unified Smiles to increase its customer base. It has also partnered with MetLife, one of the leading U.S. dental insurance providers, to deliver in-network coverage to individuals insured under its dental plans.
Recent Financial Results
In the third quarter ended September 30, 2020, ALGN’s revenue surged 21% year-over-year to $734 million on the back of 20.2% revenue growth of the Clear Aligner segment to $620.8 million. Clear Aligner volume totaled more than 496,100 cases, up 28.7% compared to the prior year. And the company’s adjusted EPS came in at $2.25, rising 52% year-over-year.
SDC’s revenue for the quarter ended September 30, 2020 declined 34% year-over-year to $156.5 million. The company’s unique aligner shipments came in at 93,301 units. However, the company reported a loss of $0.11 per share, significantly improving from the year-ago loss of $0.89 per share.
Here ALGN is in an advantageous position.
Past and Expected Financial Performance
ALGN’s revenue and EPS have grown at a CAGR of 28.9% and 87.8%, respectively, over the past three years. Also, the CAGR of the company’s free cash flow has been 54.2%.
Analysts expect ALGN’s revenue to increase 20.4% in the current quarter, 0.3% in the current year and 34.4% next year. The company’s EPS is expected to grow 37.9% in the current quarter and 76.5% next year. Moreover, its EPS is expected to grow at a rate of 18.9% per annum over the next five years.
SDC’s revenue and EPS grew at a CAGR of 46% and 49%, respectively, over the past three years. The CAGR of the company’s free cash flow has been 18.1%.
Analysts expect SDC’s revenue to decline 7.7% in the current quarter and 12.9% in the current year, and then increase 31.4% next year. The company’s EPS is expected to grow 64% in the current quarter and 67.6% next year. Moreover, its EPS is expected to grow at a rate of 178% per annum over the next five years.
Profitability
ALGN’s trailing-12-month revenue is 3.7 times SDC’s. Additionally, ALGN is more profitable with a gross profit margin of 71% versus SDC’s 65.8%.
Moreover, ALGN’s ROE and ROA of 80% and 6%, respectively, compare favorably with SDC’s negative values.
Valuation
In terms of trailing-12-month P/S, ALGN is currently trading at 18.17x, 667% more expensive than SDC, which is currently trading at 2.37x. Moreover, SDC is less expensive in terms of trailing-12-month P/B (4.84x versus 13.73x).
POWR Ratings
While ALGN is rated a “Strong Buy” in our proprietary POWR Ratings system, SDC is rated “Buy.” Here are how the four components of overall POWR Rating are graded for ALGN and SDC:
ALGN has an “A” for Trade Grade, Buy & Hold Grade and Peer Grade, and a “B” for Industry Rank. In the 146-stock Medical - Devices & Equipment industry, it is ranked #6.
SDC has a “B” for Trade Grade, Buy & Hold Grade and Industry Rank, and a “B” for Peer Grade. It is ranked #57 in the same industry.
The Winner
According to Allied Market Research, the global orthodontics market size is forecasted to grow at a CAGR of 8.2% from 2017 to hit$2.6 billion by 2023. With the emergence and deployment of effective coronavirus vaccines, teeth alignment services are now witnessing significant customer demand.
Given this backdrop, we think ALGN and SDC are good long-term investments considering their similar product efficacy and continued technological expansions. However, ALGN appears to be a better buy based on the factors discussed here.
While SDC is a relatively cheaper option to bet on, ALGN has a relatively better product ecosystem. Given ALGN’s earnings growth potential, scale of operation and higher profit margin, the company’s premium valuation is justified.
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shares were trading at $372.04 per share on Monday afternoon, up $3.04 (+0.82%). Year-to-date, has gained 17.75%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Sidharath Gupta
Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies.
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