krause fund research fall 2018 - tippie college of business · 2018-12-03 · impact on the dental...
TRANSCRIPT
DCF Target Price $192.77 Current Price $217.29 Potential Downside -11.28% 52wk Range $398.88-$203.12
Key Statistic
Market Capitalization $17,38million Shares Outstanding 8million Avg. Daily Vol. (3 Mo.) 1,166,142 Institutional Ownership 82.16% 5yr weekly ß 1.60 WACC 11.63% Dividend Yield 0 Est. 10 yr. Growth 16.4% EPS(Q3,2018) $1.24 P/E (TTM) 60.22 P/E (FY1) 37.02
Financial Strength Operating Margin (TTM) 24.58% Profit Margin (TTM) 16.89% Return on Asset (TTM) 15.71% Return on Equity (TTM) 26.37% Revenue $1.85 billion EBITDA $504.91 million
Analysts
Krause Fund Research
Fall 2018
Target Price: $190-$210 Investment Thesis
Health Care – Dental Equipment
Jiaming Lin
Shunshun Zhang
Chuanxu Ao
Jongwuk Rhim
SELL
Nov 9, 2018 Stock Rating:
(Nasdaq-ALGN)
12 Month Performance
Earnings Estimates
Company Overview
Year 2015 2016 2017 2018E 2019E 2020E
EPS 1.80 2.38 2.89 3.99 5.34 6.94 Growth -0.01% 32.2% 21.4% 38.1% 33.8% 30.0%
Align Technology, Inc. (Align), founded in 1997, is a leading global medical device company with a focus of clear aligner within the Healthcare Equipment and Supplies sector. Align is engaged in the design, manufacture and marketing of a system of clear aligner therapy and services for orthodontics and restorative dentistry. Align is diversified into four major innovative products, including Invisalign clear aligners, iTero Intraoral scanners, and OrthoCAD digital services. For the fiscal year ended 12/31/2017, Align’s total revenues rose 36.4% to $1.473 billion from 2016.
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ALGN S&P 500
Investment Positives:
Growth in utilization rate: One of the drivers for Align’s revenue growth is
the Invisalign utilization rate. The company’s quarterly utilization rate has
continuously increased for the last 9 quarters. We anticipate that the utilization
rate of Invisalign will continue to increase, due to the increasing investment in
international expansion and marketing. The growth in utilization rate will
increase the company’s future net revenue.
Growth in APEC & EMEA region: One of Align’s major growth potential is international expansion. Align’s fastest growing geographic segments are in EMEA and APEC countries. Investment Negatives:
Increasing Cost and Lower Margin: Align encounters a decline in selling
price due to the volume-based discount program, which is offered to doctors.
This program could help Align retain more doctors to use its products but
meanwhile, Align might need to extend this program due to the intense
competition to retain more doctors, and this strategy will severely damage
Align’s margins.
Currency Risk: The currency risk would make Align to meet a harsher
business environment in oversea market. The ongoing trade war between U.S.
and China has a negative impact on the currency exchange rate between two
countries. China is one of the fastest developing market in dental equipment,
the fluctuations in currency exchange rates between U.S. and China will make it
be hard for Align to grasp this new emerging market.
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Based on our forecasting and analysis, we issue a SELL rating on
Align Technology, Inc. (ALGN). Our target price is a potential
downside of 8.89% from the closing price on Nov.9, 2018.
Although we anticipate that ALGN’s revenue will grow more than
20% in the coming year. We have concerns that their growth
potential will slow down in the future. The recent quarterly report
shows that Align’s third quarter EPS is above the EPS consensus
by $0.05.
On the other hand, Align is expected to receive several 510(K)
clearances from the FDA for clear aligner products at the end of
this year. We anticipate a strong revenue growth in Q4 and the Q1
2019. Moreover, we see Align Technology will benefit from high
growth in APEC and EMEA regions.
Demographics
The demographics of the United States and the world is one of
major macroeconomics factors that affects the healthcare sector.
Based on Population Reference Bureau’s forecast, the number of
Americans ages 65 and older is estimated to increase to 98 million
by 2060, compared with 50 million today. In addition, the average
life expectancy is also increasing due to the reduction in mortality
rate in older ages. Both aging problem and increasing life
expectancy could lead to a higher demand for medical care and an
expansion of healthcare services, because the aging population is
more prone to chronic disease and injuries1.
Moreover, the percentage of teenagers over the total population
and fertility rate are additional two factors that have substantial
impact on the dental devices industry. In 2016, the global fertility
rate, the average number of births per woman, is 2.44 and the
fertility rate of the United States is 1.86 2. We anticipate that the
fertility rate will stay at this rate based on the historical trend. In
2017, the United States youth population age from 14-24 is 21.13
million, which is 13.27% of the total US population3 We believe
that the stable growth of teenage population will have a positive
impact on Align’s revenue and sales growth rate.
U.S. Real Gross Domestic Production
Real Gross Domestic Production (Real GDP) is an inflation-
adjusted measurement which can represent the value of all goods
and services produced by an economy in a given year. A positive
real GDP growth rate is very crucial for an economy since it
indicates that the economy is healthy.
Real GPD increased at 4.2% and 3.5% 4 in second and third
quarter of 2018, respectively. We think these increases were
primarily due to the tax-cutting policy announced in January 2018.
The tax-cutting policy created a better investing environment and
people will be more confident to invest.
Figure-1. US GDP Growth Rate
Source: Trading Ecnomics7
The consensus forecast about 2019 GDP growth rate is 2.2%-
2.6%5.The main reason that our analysts think this forecast is
pessimistic is that the impact from the ongoing trade war between
China and U.S. However, we think the trade war does not have a
significant impact on U.S. economy since U.S. has a higher import
than export 6. Tariffs that put on import good from China will lead
to a lower import amount which will result in a higher net export
(higher GDP). Therefore, we anticipate that the real GDP growth
rate will be slightly higher than the consensus to 2.8%.
Purchasing Manager’s Index (PMI)
Global PMI is a survey index that measures the purchasing
managers’ opinions on future economic health of production and
supply. For the Health Care sector, the PMI is a key indicator for
the health of manufacturing side of the Health Care sector. With a
more confident PMI level, the purchase managers come a greater
willingness to expend the production. A PMI above 50 represents
an expansion when compared with the previous month.
Historically, PMI index increased during expansionary periods.
Global PMI hit 3-year high of 54.5 in Dec. 2017 and followed by
a decrease to 52.1 in Oct. 20188. We attribute the decrease of the
manufacture confidence to the uncertainty surrounding the trade
conflict with China. The threat of a trade war and further ongoing
tariff barrier would mean a decrease in export as well as an
increase in cost of production. We expect the PMI will continue
to decrease if the trade war tensions do not ease.
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ECONOMY OUTLOOK
EXCETIVE SUMMARY
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Figure-2. Global Manufacturing PMI8
Source: Bloomberg8
Government Regulation
Historically, the U.S healthcare sector is one of the most regulated
sectors both at state and national level. The U.S. Food and Drug
Administration (FDA) is the major federal regulatory agency in
the U.S. The FDA regulates the sector by approving
manufacturers’ products prior sales. Most of medical devices are
regulated under the United States Food, Drug, Cosmetic Act (the
“FD&CA”). The FD&CA requires all of medical devices sold in
the U.S. to be safe and effective for intended use. In addition to
federal regulations, companies that sold their medical devices to
the foreign countries are also subject to foreign countries’ laws9.
The trend for approval of drugs from the FDA dropped sharply in
2016; however, by 2017 the number has recovered. In 2018, the
FDA, compared with 27 in the previous year, has approved 35
medical devices. President Trump is fostering the approval to
increase the competition, which could lead to a cost-cut for the
customers. We anticipate an increase in the number of approvals
of medical devices because of companies’ increasing trend in
research and development expenses. For Align Technology, the
success of getting approvals for its newly invented products is
crucial for the company’s success. In 2017, Align announced
Invisalign Teen with mandibular advancement, the first clear
aligner solution for Class II correction. In October 2018, the
company received 510(k) clearance for the product from the FDA
with commercial availability in US starting in November 2018.
The received approvals of the product from the FDA and foreign
regulations could boost the company’s net sales because of high
demand of the products from tween and teen patients10.
U.S. Tax Cuts and Jobs Act. The U.S. Tax Cuts and Jobs Act (the
“TCJA”) was enacted into law on December 22, 2017. The TCJA
made significant changes to the Internal Revenue Code, including,
but not limited to, a corporate tax rate decreased from 35% to 21%
starting in the 2018 tax year. Align Technology has estimated the
impact of the TCJA and recorded a provisional amount of $84.3
million additional income tax expense in the fourth quarter of
2017. This alone is indicative of the large cash balance the
company holds overseas. Therefore, we believe the corporate tax
holiday may result in the repatriation of significant cash for Align.
This could in turn spur capital deployment initiatives including
further stock buybacks (Align’s BOD already authorized a $300
million stock repurchase program in April 2016)11.
Industry Description
The dental equipment industry is a subindustry within the
healthcare equipment and supplies industry. The dental equipment
industry includes manufacturing of devices that are used to
diagnose and treat dental conditions. Product lines cover dental
lasers, systems and parts, hygiene maintenance supplies16. The
key drivers of this industry include a rise of population, people’s
dental conditions and an increase of demand for cosmetic
dentistry. Align Technology mainly competes with companies
which manufacture and sell dental aligner devices.
Industrial trends
Invisible Braces / Clear Aligner Trend
The old metal teeth braces had many drawbacks which lead to
customers’ disinclination. The most obvious one is that the metal
braces are noticeable. Customers who wearing metal braces may
encounter some circumstances where metal braces would be an
obstacle. It would be inconvenient for customers to speak to the
public or in front of cameras. In fact, 92% of teenagers would be
self-conscious when they are wearing metal braces. Adolescents
are inherently self-conscious12. A metal braces would make them
do exactly opposite when they start talking. Therefore, more
people choose invisible braces.
3D Printing Technology
The emerging 3D printing technology has been used by many
orthodontist product providers due to its lower average cost, faster
fabrication procedures, and more flexible modeling. With 3D
printing technology, the process of producing teeth aligners will
be quicker and cheaper. The finished aligner will also be more
accurate because of the accuracy of the digital 3D scanners13. The
main drawback of 3D printing technology is that the cost of
buying 3D printers is high. However, the commercialization and
increasing popularity of invisible aligners will allow
manufacturers implement 3D printing technology to be profitable
due to economies of scale.
Moreover, the FDA introduced a guideline to healthcare
manufacturers, who are researching on the implementation of 3D-
print and smoothed the regulatory path. It results in a more
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INDUSTRY ANALYSIS
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effective and clearer path for the manufacturers to apply the
approval of 3D-printing from regulatory agencies14.
Industry Life Cycle
As an orthodontics treatment, people have considered the teeth
aligner as a kind of discretionary product since not everyone has
unaligned teeth or has concerns about unaligned teeth. Moreover,
the orthodontists industry is approaching the mature stage because
its industry value added (IVA), which measures the industry’s
contribution to the economy, is expected to grow 1.2% annually
which is lower than the anticipated average growth rate of U.S.
GDP, 2.0% in the next 10 years15. The main drive forcing growth
in this industry is from the development of clear aligners. Clear
aligners’ invisible feature has been attracting more patients to
receive orthodontic treatments.
Industrial Players (3-4)
Danaher Corporation (DHR)
Danaher Corporation is a well-diversified and international
medical corporation manufacturing testing, analyzing and
diagnosing products. The company’s main revenue streams come
from four segments, including life science, diagnostics,
environmental and applied solutions, and dental. The company
manufactures and distributes its products across more than 50
countries. In the 2017 fiscal year, more than 35% of net revenue
come from the United States and $2.81 billion revenue come from
dental segment, which is around 15% of total revenue17.
Dentsply Sirona Inc. (XRAY):
Dentsply Sirona Inc. is the world’s largest manufacturer of
professional dental products. The company’s products include
dental endodontic instruments, ultrasonic scalers, dental x-ray
equipment and intraoral cameras and etc. The majority of its
revenue comes from the United States and Europe, which amount
to 35% and 40% of total revenue. In the 2017 fiscal year, the
company generated $3.99 billion in net revenue, with 6% YoY net
revenue growth. However, a lower revenue expectation and an
increased margin pressure reflected on the company’s recent
second quarterly report and management guidance18.
Henry Schein, Inc. (HSIC)
Henry Schein, Inc. is a leading multinational company which
distributes dental supplies, equipment, and pharmaceuticals.
HSIC not only presents in dental market, but also operates as a
veterinarian and office-based health care provider. The company’s
around half of total revenue is from global dental division19.
Compared with the three above mentioned companies, Align
Technology is more specialized in the dental aligner market. Most
of Align’s products are related to orthodontics treatments. The
company keeps developing and marketing its invisible aligners
and other related products in the orthodontics market.
Industrial Specific Comparisons (Peer Comparisons)
Because there are no other public companies in the orthodontics
market, we decide to compare Align Technology to companies,
which also operate in the dental equipment industry in order to do
a more comprehensive industry comparison. The companies that
we have compared with are DHR, XRAY and HSIC.
Sales Volume & Growth
In 2017, the global dental equipment and consumables market
size was estimated at around $30.2 billion. Based on the four peer
companies’ sales in 2017, HSIC occupies the most part of the
dental market among the four companies. Align’s 2017 net
revenue reached $1.473 billion with 36.44% YoY growth.
Compared with the other three peers, Align achieved a much faster
sale growth rate in 2017. The reason why Align only occupies a
small part of the market is that the company only focuses on a
niche market20.
Figure-4. Dental Segment Leaders by Sales
Source: Bloomberg33
Figure-5. Dental Segment Revenue Growth in 2017
Source: Bloomberg33
Profitability (Operating Margin)
Evaluating the operating margin of the companies is helpful to
measure the companies’ profitability and operating efficiency.
According the graph below, XRAY has the highest operating
margin at 27.17% in 2017 among the four companies. Align also
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had a strong operating margin in 2016 and 2017. However, we
anticipate the company’s operating margin to decrease in the next
several years due to the recent volume-based discount programs
to doctors.
Figure-6. Peer Comparisons based on Different Financial Ratios
Source: Bloomberg33
Shareholder Stock Returns
Figure-7. Stock Performance among peers
Source: Yahoo Finance34
The healthcare industry is one of the fast-growing industries in
stock market and is outperforming the S&P 500 year to date. The
ETF for broad healthcare industry (VHT) has grown 14.79% since
the beginning of this year, in comparison to 4.02% growth of S&P
500 index. Among the four peers, Align Technology has the
greatest 5-year return. The company has had a 6.2% return since
December 31, 2017. However, Align stock price reached $389.98
on Sep 25, 2018, which is 75% over the price at the beginning of
the year. One of reasons for the recent stock plunge is a fear that
the decline of average product selling prices may cause a slow
growth or even decline on the company’s future revenue21.
Industrial Competition Porter’s 5 Forces
Threat of New Entrants: Low
The U.S Food and Drug Administration regulations and approval
process raise a barrier of entrance for the Health Care Equipment
and Supply industry. The FDA classified medical devices into
three Classes, with Class III being the most regulated. All non-
endosseous-implant dental devices are required to register under
the FDA medical device product code. Regulatory control
increases from Class I to Class III. Most Class I devices are
exempt from Premarket Notification 510(k); most Class II devices
require Premarket Notification 510(k); and most Class III devices
require Premarket Approval. In addition, all firms must pay a
registration fee to the FDA22.
The high expenditure is one reason that the threat of new entrants
is low. Research and development costs are extremely high for
companies within the Health Care Equipment and Supply
industry. Thus, the barriers to entry are relatively high, compared
to other sectors.
Power of Suppliers: Moderate
The main upper-stream suppliers in the Health Care Equipment
and Supply industry are raw material and manufactory equipment
providers in various sectors. In the U.S. market, companies that in
the dental equipment and supply sub-industry, such as 3M and
Align Technology, are often large enough to bargain on price.
Meanwhile, global markets also allow firms to access supply
markets in different economy. In fact, many firms tend to develop
production facilities overseas to reduce the cost. The ongoing
trade war might affect domestic production as discussed in the
economy overview23.
On the other hand, there are several factors that limit
manufacturers to change suppliers. This includes the switching
cost that only occurs when the medical producers change supplier
to another and forward integration which occurs when a supplier
decides to become a direct competitor in the market that it serves.
Upper-stream suppliers who provide complex and critical
materials, such as semiconductor producers, have a higher
bargaining power24.
Thus, we consider supplier power is moderate in the health care
equipment & supply industry and dental supply sub-industry.
Threat of Competitors: High
The healthcare equipment and Supplies industry is highly
competitive due to its high average profit margin. The industry
consists of both specialized and companies like Align and large
companies, like Danaher Corporation and Dentsply Sirona, Inc.
Moreover, orthodontic companies such as Align, lack patent
protections in foreign markets. In China, many local companies
are imitating major orthodontic companies’ clear aligners and
have gained significant market shares in China. Therefore, we
think the threat of competitors is relative high.
Threat of Substitutes: High
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Due to the various functions among different dental products, we
need to differentiate the threat of substitutes of different product-
based markets. For dental lasers and systems, it is unlikely to find
a substitute product. On the other hand, the threat of substitutes
for hygiene maintenance supplies is relatively high. The
company’s manufacturing dental equipment and supplies are
facing the risk of substitute products since the industry is a fast-
evolving industry. Alternative products for clear aligners include
traditional metal teeth braces which have a relatively low cost
compared to the 3D printed clear aligners. Moreover, the
traditional braces have a shorter therapy cycle, in comparison to
the clear aligners. Therefore, we think the threat of substitutes is
high.
Power of Buyers: Moderate
With the limited types of orthodontics treatment in the market
currently, consumers only have few options when they want to get
orthodontics treatments. The market currently has cheaper
traditional visible metal teeth braces and expensive invisible clear
aligners. Buyers do not have too much bargaining power over the
Align if the buyer want to choose clear aligners because Align
provides the best clear aligners, and the switching to traditional
braces will be costly and time consuming because two types of
products have completely different treatment procedures.
However, the buyers will have some bargaining power if they
accept the traditional braces because there are various traditional
aligner providers in the market. Thus, we think the power of
buyers is moderate.
Company Overview
Align Technology, Inc founded in 1997 in the Medical Equipment
industry and went public in 2001, issuing shares on the NASDAQ.
Align leads the invisible orthodontics market by providing
innovative solutions. The company not only designs and
manufactures systems of clear aligner therapy, intra-oral scanners
and computer-aided design/computer-aided manufacturing
(CAD/CAM) digital services for dentistry and dental records
storage, but also markets the system globally to benefit patients
needing oral modification. Align Technology, Inc. has two
operating segments which are Clear Aligner and Scanner &
Services. Clear Aligner is a removable and invisible appliance to
straighten teeth. The scanner & services segment is designed to
scan the patients’ teeth accurately to help the aligner operator to
fully diagnose the condition and structure of the teeth. Currently,
Align holds an estimated 67% share of clear aligner market based
on revenue25.
Corporate Strategy1
Align’s current general corporate strategies are to expand the
Invisalign clear aligners as preferred products in global
orthodontist market, to advertise the aligners among teen-aged
patients, and to establish the iTero Element Scanners as the
primary 3D digital dental imaging equipment. Align plans to
implement these strategies through international expansion and by
increasing orthodontist utilization and business cooperation.
In order to occupy more international markets, Align has invested
a significant amount of capital resources in infrastructure over the
world. In addition to the existing facilities in San Jose and Costa
Rica, in 2017, the company set up two new Invisalign treatment
planning facilities in Chengdu, China and Cologne, Germany.
These new facilities aim to help Align enter new markets and to
support the company’s local customers. The company’s Q3 2018
net revenue from China increased by around 50% compared to the
Q3 2017 revenues from China. We anticipate a huge market
potential in China, the potential to an increase of revenue from
China could be a significant driver of the company’s net revenue.
However, with the strong growth in international revenue, we
should also be aware of the possibility of some downside if Align
does not meet the expected Invisalign adoption rate in the future.
In addition to international expansion, Align strives to increase the
orthodontist utilization rate by innovating the product and making
it more applicable for a wide range of patient cases. In March
2017, the company launched Invisalign with mandibular
advancement, which is the first clear aligner solution for Class II
correction in teen patients. This new offering acquired approval in
the U.S, Canada, EMEA and APIC. We expect that the
advancements in products and technology will boost the products’
orthodontist utilization among adult and teen-aged patients.
Align also increased advertising iTero intraoral scanners to
orthodontists, which is a critical component of the Invisalign
treatment. The intraoral scanning systems is an alternative
scanning system for traditional cast models. In comparison to
scanner net revenue in 2016, the 2017 scanner revenue increased
by 35.1% to $164.1 million. We believe that with increases the
Invisalign utilization rate and the iTero adaptation rate, the
revenue from the scanner will keep increasing in the foreseeable
future.
Starting in October 2016, Align became SmileDirectClub’s
exclusive third-party supplier for its minor tooth movement
aligner program. Through the transaction, Align manufactures
SmileDirectClub’s aligner product without sharing Align’s
aligner technology. According to the management description, the
products from two companies are targeted to different patients and
there is very little cannibalization of the existing market.
Therefore, we believe that the agreement could raise Align’s
revenue by manufacturing SmileDirectClub’s products without
threats of competition.
Figure-8. Product Digital Workflow
COMPANY ANALYSIS
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Source: Align Technology, Inc. Form 10-k 201724
Life Cycle
According to "Global Invisible Orthodontics Market 2018-2022"
report, the global invisible orthodontics market is expected to
grow at a CAGR of 12.93%. The increased target population is
followed by the demand, which is a key factor for the market.
Align dominates the market share and shows an advantages of
product differentiation among the players. CAD/CAM technology
is also another factor that will drive the sales. Referring to the
annual reports, we found that Align has been spending more of its
R&D cost to develop technology. Recently, introducing the
second version of the iTero scanner advanced CAD/CAM
technology is applied to this model and is expected to bring
additional revenue of $ 200 million from 10 million devices. By
looking at the cash flow, the amount used for purchase of property,
plants and equipment (PP&E) doubled from 78,045 million in
2017 Q2, to 115,295 million in 2018 Q2. This increase can be
explained by tracking Align’s recent news of constructing
manufacturing and education centers in China and Spain. Looking
at the company’s acquisition history, the deals were mostly buying
distribution companies overseas and 3D technology companies.
We anticipate that the company is expecting to grow further in the
international market. Therefore, we believe the company is in the
later growth stage.
Financial Analysis
Align Technology experienced strong positive revenue growth
over the past five years, with a 22.23% CAGR. For the third
quarter of 2018, the company experienced another better than
expected quarter. The EPS in the third quarter was $1.24, which
was 4.2% over the consensus EPS forecast of $1.19. However,
compared with the second quarter of 2018, the third quarter EPS
decreased $0.06. On the day of announcement for third quarter
earnings, the company’s stock price dropped more than 20% from
$290.83 to $232.07. The main reason for the decrease in EPS and
stock price is the slow net revenue growth and a decrease in clear
aligners’ sales from the second quarter to the third quarter. Total
net revenue just achieved a 3% Q/Q growth. In addition, due to a
decline in average selling price, the clear aligners’ sales
experienced a decrease between the two quarters, which contrasts
to the market’s optimistic revenue estimation.
Figure-9. Align Revenue Trend in USD Thousand
Source: Align Form 10-k 2017 24 and Form 10-Q 2018 Q3 27
In May 2018, Align announced up to $600 million common stock
buyback, which would be equal to to 31.77% of its shares
according to the number of shares outstanding and stock price in
November 2018. Align has bought back $50 million worth of
common stock as of August 2018. We anticipate Align will keep
buying back at same pace and finish this share repurchase program
in May 2020. We think the repurchase plan will have a positive
impact on the EPS due to an increase in income and a decrease in
shares outstanding.
Based on our analysis of the company’s business performance, we
are holding a conservative expectation about ALGN’s future stock
price. The future performance of the business is determined by
whether the company could increase its clear aligners’ sale
volume significantly and generate a robust revenue increase in the
next fiscal period as its previous fiscal years.
Product Lines
Align Technology categories its products & services into two
segments: Clear Aligner Segment and Scanner segment. For the
year ended December 31, 2017, net revenue in the clear aligner
segment represents approximately 89% of worldwide net revenue,
while the scanner segment represents the remaining 11% of
worldwide net revenue.
Figure-10. Product Classification
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Source: Align Technology, Inc. Form 10-k 201724
Clear Aligner Segment
a) Comprehensive Products
Comprehensive Products generate the most profit for Align. The
products under this category include Invisalign® Full,
Invisalign® Teen, and Invisalign® Assist. The Invisalign system
is used for a wide range of malocclusion, the Invisalign Full and
Invisalign Teen treatment plans each consist of the number of
aligners necessary to achieve the doctor’s treatment goals.
b) Non-Comprehensive Products
Lower-cost solutions are used for less complex orthodontic cases,
noncomprehensive treatment relapse cases, or straightening prior
to restorative or cosmetic treatments such as veneers. Some of the
solutions include Invisalign Express 10, Invisalign Express 5,
Invisalign i7 and Invisalign Lite & Go. Non-comprehensive
products are only available in select country markets. Non-
Invisalign products that are manufactured for SmileDirectClub®
are also recognized under this segment.
c) Non-Case Products
Clear Aligner non-case products include retention products,
Invisalign training fees and sales of ancillary products, such as
cleaning material and adjusting tools used by dental professionals
during treatment. Products include SmartTrack™, Invisalign® G
series and Vivera® Retainers.
Scanner Segment:
a) Intraoral Scanning Systems
Intraoral scanning devices enables dental practitioners to create
3D images of a patient's mouth. The iTero® system is sold
alongside two software packages: Restorative and Orthodontic.
Both programs conduct a digital scan, which is then used in a CAD
program to customize each pair of Invisalign.
b) Additional Services
Additional Services include all scanning system related
applications, tools and services. Such as Invisalign Outcome
Simulator, Invisalign 3D Assessment tool, OrthoCAD iCas &
iRecord.
Figure-11. Percentage of ALGN 2017 Revenue by Products
Source: Align Technology, Inc. Form 10-k 201724
Most of ALGN’s revenue is generated from Invisalign related
products. In addition, the Scanner segment’s weights on Align’s
revenue is increasing since 2013. The company considers its iTero
scanner as a potential growth opportunity26.
Marketing Strategy
Align’s marketing efforts focus primarily on the Invisalign
System and continuing to increase adoption and utilization rate
among orthodontists and GPs worldwide. Align operates direct
sales channels, which include quota carrying sales representatives,
sales management and sales administration. To increase the clear
aligners’ sales volume, Align provided volume-based discount
programs to doctors starting in 2017. Moreover, the company sold
a number of products at different prices.
When Align announced the discount programs, the company
claimed that the discount programs would not have a significant
impact on the revenue streams. In fact, the Invisalign’s average
selling price dropped from $1,315 in Q2 2018 to $1,230 in Q3
2018. At the same time, the revenue from clear aligners in Q3
2018 decreased to $427 million from $433 million in Q2 2018.
This decrease implies that the increase in sale volumes was not
enough to cover the decrease of selling prices and the promotion
programs negatively affected the company’s revenue streams. It
led to a federal class action lawsuit against Align Technology filed
by Willie Briscoe. The complaints alleged that the company
issued misleading and/or false statements and/or failed to disclose
the actual negative effects of the discount programs on the
business operation.
SWOT Analysis
Clear Aligner
Comprehensive Products
Non-Comprehensive
Products
Non-Case
Scanner
Intraoral Scanning Systems
Additional Services
Comprehensive, 69%
Non-
Comprehensive,
14%
Non-Case,
6%Scanners,
11%
8
Strengths
Advanced technology: Since ALGN incorporated in 1997, the
company’s focus on production innovation strengthened its
competitiveness and sustained its leading position in the market.
As of December 31, 2017, the company had 420 active U.S
patents, 456 active foreign patents and 416 pending global patent
applications. The great amount of intellectual property is a
substantial advantage for the company. Besides Invisalign clear
aligners, the company strives to establish the iTero intraoral
scanner as the preferred 3D scanning device26.
Business performance: Strong business performance in the
Invisalign system and clear aligner is another strength of the
company. According to ALGN’s most recent financial report
published in June 2018, there was a constant increase in the
Invisalign utilization rate from the second quarter of 2016 to the
second quarter of 2018. The total utilization rate was 6.0 cases per
doctor in the second quarter of 2018, compared with 5.6 in the
second quarter of 2017. From the year ended in 2016 to the year
ended in 2017, the clear aligner case volume increased 33.9% in
North American and 44.9% international. We anticipate that the
company’s net revenue from clear aligners will continue to
increase because of improvements in the product adoption rate27.
Weaknesses
Dependence on Concentrated Product Line: Align’s greatest
weakness is its dependence on the net sales of the highly
concentrated product line. The majority of net revenue comes
from the sale of Invisalign System and Clear Aligner Products.
Almost 88% of net revenues generated at Clear Aligner. A
decrease in market demand for the company’s product or an
increase competition from existing and potential competitors
could negatively affect Align’s net revenue, gross margin, and net
income.
Opportunities
International Expansion: One of Align’s business strategies is
international expansion. International expansion provides
opportunities for the company to increase its net revenue, lower
its operating expenses and improve global market penetration.
The company opened new treatment planning facilities in China
and Germany to support its customers in June 2017 and May 2018.
The company plans to open a treatment planning facility in Spain,
another treatment planning facility in Costa Rica, and a
manufacturing facility in China. Align could take advantage of
low labor costs in China to improve its gross margin. Moreover,
on April 25, 2018, the company received market approval for the
iTero Element intra-oral scanner from the China regulatory
agency. The product launch in China has a significantly positive
impact on the company’s revenue growth due to the size of the
potential market opportunity in China27.
Positive Market Landscape: The increase in healthcare
expenditures in the United States and the growth in the dental
device market could provide opportunities for Align to raise
revenue. According to Global Data, by 2025, the global dental
devices markets forecast to reach $23,045.7million and the global
CAD/CAM dental systems market forecasts to reach US$1,487.1
million. The company could benefit from the positive outlook of
overall market. It could also imply the potential success in the
company’s research and development for future products28.
Threats
Political and Economic Instability: One of threats is global
political and economic instability. International revenue occupies
larger portion of net revenue in the recent years. The trade war
between China and United States could affect company’s
operation and the potentially adverse change in tariff may reduce
the company’s net income. In addition, the fluctuations in
currency exchange have negatively impact the company’s
financial condition. Since April 2018, the Chinese Yuan to US
Dollar has depreciated by 9.8%. In this year, 17% of international
revenues come from China, which is the second largest country
importing Invisalign. The depreciation of Chinese Yuan has had a
$12 million negative impact on net revenue29.
Dependence on single source suppliers: If Align’s suppliers
cannot fulfill the raw resource demand on time; it could negatively
affect the company’s daily business operation. The raw materials
used in clear aligner production were supplied from a single
source. If these suppliers encounter any financial or operation
problems, it may lead to delivery delays and increases in market
prices26.
Revenue Decomposition
We break down Align Technology’s total revenue into four
reportable segments: Comprehensive Clear Aligner, Non-
Comprehensive Clear Aligner, Non-Case products and Scanner
Segments. We further decompose each segment into total sales,
year over year growth and percentage of net revenue. The reason
we choose to break the Clear Aligner Segment into three parts –
comprehensive, non-comprehensive, and Non-case is because
Align reports those segments separately in their financial
statements. Moreover, the historical and management forecasted
is different for each of the three product lines. To calculate our
projections for revenue growth, we consider the historical growth
of each of the four segments, projected global orthodontic market,
and changing patient preference of using.
Comprehensive Products
The comprehensive products are Align’s main revenue source. In
the past decade, this segment has provided the most consistent
VALUATION DISCUSSION
9
sales-growth contribution to the company. We forecast Align
comprehensive products to continue to experience high growth
because of (1) international market expansion, (2) further market
penetration and (3) new FDA 510(K) clearance for comprehensive
Invisalign products. Therefore, we estimated that the revenue will
grow in 2018, 2019, and 2020 will be 28%, 30%, and 26%,
respectively. After 2020, we anticipate the revenue growth rate
will gradually decline.
Non-Comprehensive Products
Align’s non-comprehensive product experienced a 74% growth
because of new products entering the market before the beginning
of 2017. Invisalign Go and Invisalign G7 were launched in Europe
and North America around January 2017. Align also entered into
a supply agreement with SmileDirectClub which also contributes
to the Non-Comprehensive segment revenue. We anticipate that
non-comprehensive products such as Invisalign Express and
Invisalign Go will maintain a strong growing trend in EMEA and
APEC markets. However, the growth rate will not be as high as
74% in 2017. We estimated that non-comprehensive revenue will
grow 30%, 26%, and 24% for 2018, 2019 and 2020 respectively.
Moving forward, we anticipate that revenue will gradually decline
for the rest of forecasted period.
Non-Case products
Sales of retention products, Invisalign training fees and ancillary
products make up the revenue for non-case products. For retention
and ancillary products, we estimate the sales growth will be
constant with the weighted average sales growth of
comprehensive and non-comprehensive clear aligner revenue
growth. However, the Invisalign training fee growth will increase
in the future due to the increase in number of Invisalign Doctors
trained in the oversea market. Based on historical information, we
anticipate the non-case product will grow 25%, 30%, and 25% in
2018, 2019 and 2020 respectively30.
Scanner Segments
Revenue in this segment is mostly generated from iTero scanners.
iTero intraoral scanning is an emerging technology which is used
by orthodontists to take 3D intraoral scans of patients’ teeth
structure. Align has the competitive advantage in this niche
market with the iTero system. The Align management team see
this segment as a fast-growing opportunity and the growing rate
will increase in 2018. We estimated the 2018 scanner segment
revenue based on the first three quarters data of 2018 and fourth
quarter outlook31. We estimate that the scanner revenue growth
rates for the 2018 fiscal year will be 28.34%32.
Cost of Goods Sold
We calculated the average of the cost of goods sold for 10 years.
Align's historical COGS/Sales percentages did not have any
anomalies and showed an average of 24% when calculated.
However, the volume-based discount program that Align offers to
its doctors and the more competitive market will slightly decrease
its gross margin. Therefore, we anticipate that Align’s cost of
goods sold will slightly increase and reach 25% of its sales.
Research and Development Expenses
By calculating the percentage of research and development costs
over net revenues in the past five-years periods, we find a strong
correlation between R&D costs and net revenue. Based on
historical periods, Align’s R&D was on average 6.9% of net
revenues. We anticipate that this correlation will continue to exist
through our forecasted periods and the percentage of sales will
stay at 6.9%.
Sales, General and Administrative Expenses
Selling, general and administrative costs include
advertising/marketing cost of the company,
equipment/maintenance costs, and outside service costs. The
historical expenses for the last 5 years were relatively averaging
as 44.95% of its sales. The historical trend over the past three
years shows a slow cost-cut and we assume the percentage of sales
will decrease slightly in the future and eventually reach 40% in
the 2027, which is the CV year in our model.
Weighted Average Cost of Capital (WACC)
Based on our analysis and calculation, our WACC is 11.63%. The
WACC includes an equity weight of 99.70% and a debt weight of
0.3%. We believe that the company’s capital structure is not going
to change in the future and the WACC stays at 11.63% in the long-
term.
Cost of Equity
We calculated our cost of equity based on the Capital Asset
Pricing Model (CAPM). The Beta used in our model is 1.597
which is from Bloomberg’s raw 5-year weekly beta for Align. We
use a 3.15% risk free rate, which is the current 10-year U.S.
treasury rate. We use 5.32% as the market risk premium, which is
from Prof. Damodaran’s published market risk premium. Align’s
cost of equity is equal to 11.65%.
Cost of Debt
According to the company’s annual report, Align currently does
not hold any short-term or long-term debt. The only thing included
in the debt is the operating leases. Therefore, the cost of debt is
equal to the implied interest rate of operating leases, which is 6%.
The current marginal tax rate is 21%. Therefore, the after-tax cost
of debt is 4.74%
WACC Weights
The market value of equity is calculated by multiplying Align’s
current stock price by the number of shares outstanding. The
market value of equity that we get is $17.391 billion. Because
there are no short-term and long-term debts owned by company,
10
the market value of debt is equal to the present value of operating
leases, which is $51.54 million. Thus, the weight of equity is equal
to 99.70% and the weight of debt is equal to 0.3%. The WACC is
equal to 11.63%.
Valuation Models
DCF & EP Models
We believe our discounted cash flow (DCF) model and economic
profit model (EP) provide us with the most accurate intrinsic price
for the Align Inc. These models incorporated all main value
drivers including net operating profit less adjusted tax
(NOPLAT), invested capital (IC), free cash flow (FCF), weighted
average cost of capital (WACC), return on invested capital
(ROIC), and economic profit (EP). The price that we calculated
by using these two models is $175.18 per share and $192.77 per
share after the partial year adjustment. We believe this price
reflects the intrinsic value of the company. The adjusted target
price is 11.28% below the current stock price.
Dividend Discount Model
The dividend discount model gave us an intrinsic value of $90.43
per share, with a partial year adjusted price of $99.51 for Align
Technology. We do not think the value from DDM is an accurate
measurement for Align’s stock because the company does not
distribute dividends to its shareholders and is not anticipated to
pay a dividend in the future based on the management’s
discussions.
Relative P/E Valuation
There are five peer companies included in our relative P/E
valuation model. These five companies are partially comparable
to Align because they are all in the dental equipment industry. By
calculating forward P/E multiples in 2018 and 2019 for the five
peers, we got average 23.16x and 19.60x times P/E multiples in
2018 and 2019, respectively. Based on 2018 and 2018 P/E
multiples, the implied relative values are $92.36 and $104.71 per
share, respectively.
However, we are in doubt about the implied relative values
obtained from the relative model. The reason is that in the
orthodontist market, there are no direct public competitors with
Align. For those peer companies included in the valuation model,
even though they generated revenues from selling the dental
equipment, they have not stepped into aligner market. In the clear
aligners’ market, Align has a significant competitive advantage
over its peer companies because of its product applicability for a
wide range of complex cases and the better quality of the products.
In addition, the five peer companies also operate in other different
industries, such as life science and pharmaceutical industries.
However, Align only specializes in a niche market. Therefore, we
believe that the relative valuation model is not the way to evaluate
Align’s stock price.
Our sensitive analysis provides detailed comparison among
different rates for factors that were used for valuation. Factors
influence the fluctuation of Align's stock price by changing its
growth, margins, and costs.
Risk free vs. CV growth of NOPLAT
Risk free rate is related with many components in our calculations
such as the cost of equity and the cost of debt. Through recent
news and economic opinions, we have concluded to use the range
between 2.70% to 3.60%. In our analysis, we can see that even a
slight increase of .15% in the risk free rate can decrease the CV
growth of NOPLAT sharply. The growth rate contains our
assumption of Align's expected available market share and its
global stance. With in-depth consideration of its historical
performances and the industry growth, we concluded the range is
between 5% and 5.75%.
Market premium vs Beta.
Market premium is one of the main components for calculating
the WACC. While this is still a debatable factor among finance
professionals, we decided to have the range between 4.72% to
5.92%. Our analysis provides how the impact of increasing the
rate can decrease the stock price sharply by using the same beta.
For beta, we used the range of 1.3 to 1.9. Through our compact
research, the risk for Align seems to be slightly higher than the
market. However, with optimistic expectations for the company's
technology and future demand for the product keeps the risk in a
confident range. Thus, considering future economic factors and
trends, we decided to use 5.32% for the market risk premium and
1.6 for beta respectively.
Cost of goods sold vs Marginal tax rate
For our valuation, we averaged 10 years' historical data for cost of
goods sold which was 25%. While Align is trying to reduce the
cost for its product for the coming years, the cost plan was not
available to public. Therefore, with notes from management
discussions, we decided to keep the range within the forecast
based on the 10-year’s historical data. Assuming the cost cut will
happen slowly over the years, due to the upcoming product on its
plan, we have decided to choose 25% for cost of goods sold.
Increase of 0.5% will decrease the stock price by average of $4.13.
With the marginal tax rate at 21%, the stock price for Align
seemed reasonable at 198.92.
CV R&D vs. CV SG&A
To determine either CV R&D cost or CV SG&A cost have more
influence to the price, we examine both rates in our sensitivity
analysis. We have assumed the CV growth for R&D and SG&A
cost are 6.9%, and 40%, respectively. With every 1% increase in
CV R&D cost, the price will decrease $3.72 per share. With every
1% increase in CV SG&A cost, the price will decrease $3.85 per
SENSITIVITY ANALYSIS
11
share. Therefore, we concluded that Align’s CV R&D cost and
CV SG&A cost are have almost the same impact to its stock price.
Pre-tax cost of debt vs CV growth of ROIC
Our assumption for pre-tax cost of debt was at 6%. Increasing the
rate at 1% each time, the CV growth of ROIC increased at 10%
respectively. The fluctuation seems trivial and through our
analysis we recognized that Align does not have threshing amount
of debt, but rather can operate the business by cash flow from
operations, it is reasonable to keep the rate at 6%. The ROIC
growth rate was at 190%, with our assumption that the demand for
the product will decline slowly due to increased competition in the
market of teeth aligners.
12
This report was created by students enrolled in the Security
Analysis (6F:112) class at the University of Iowa. The report
was originally created to offer an internal investment
recommendation for the University of Iowa Krause Fund
and its advisory board. The report also provides potential
employers and other interested parties an example of the
students’ skills, knowledge and abilities. Members of the
Krause Fund are not registered investment advisors,
brokers or officially licensed financial professionals. The
investment advice contained in this report does not
represent an offer or solicitation to buy or sell any of the
securities mentioned. Unless otherwise noted, facts and
figures included in this report are from publicly available
sources. This report is not a complete compilation of data,
and its accuracy is not guaranteed. From time to time, the
University of Iowa, its faculty, staff, students, or the Krause
Fund may hold a financial interest in the companies
mentioned in this report.
IMPORTANT DISCLOSURE
13
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Align Technology, Inc.Key Assumptions of Valuation Model
Ticker Symbol ALGN
Current Share Price $217.29
Current Model Date 11/13/2018
FY End (month/day) Dec. 31
Pre-Tax Cost of Debt 6.00%
Beta 1.60
Risk-Free Rate 3.15%
Equity Risk Premium 5.32%
CV Growth of NOPLAT 5.00%
CV Growth of Revenue 5.00%
CV ROIC Growth 190.00%
WACC 11.63%
Marginal Tax Rate 21.00%
Effective Tax Rate 6.60%
CV COGS (% of Sales) 25%
CV SG&A (% of Sales) 40%
Align Technology, Inc.Revenue Decomposition[Currency : USD Million]
Top-Down MethodFiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E
Comprehensive Products 659.48 777.51 1016.65 1301.32 1691.71 2131.56 2643.13 3224.62 3869.55 4527.37 5206.48 5831.25 6122.82
YoY% 12.45% 17.90% 30.76% 28.00% 30.00% 26.00% 24.00% 22.00% 20.00% 17.00% 15.00% 12.00% 5.00%
Non-Comprehensive Products 93.00 118.79 206.28 268.16 337.88 418.98 511.15 613.38 705.39 775.92 838.00 888.28 932.69
YoY% 11.01% 27.72% 73.65% 30.00% 26.00% 24.00% 22.00% 20.00% 15.00% 10.00% 8.00% 6.00% 5.00%
Non-Case Products 50.73 64.79 88.40 119.35 155.15 193.94 242.42 290.91 334.54 368.00 397.44 421.28 442.35
YoY% 11.01% 27.72% 36.44% 35.00% 30.00% 25.00% 25.00% 20.00% 15.00% 10.00% 8.00% 6.00% 5.00%
Scanner Segment 42.27 118.79 162.08 208.01 269.03 338.09 418.14 508.79 606.63 703.54 802.25 892.15 936.76
YoY% -7.49% 180.99% 36.44% 28.34% 29.33% 25.67% 23.68% 21.68% 19.23% 15.98% 14.03% 11.21% 5.00%
Total Net Revenues 845.49 1079.87 1473.41 1896.84 2453.78 3082.56 3814.84 4637.70 5516.11 6374.84 7244.16 8032.97 8434.62YoY% 11% 28% 36% 29% 29% 26% 24% 22% 19% 16% 14% 11% 5.0%
Align Technology, Inc.Balance Sheet[Currency : USD Million]Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E CV 2027
AssetsCash & cash equivalents 167.71 389.28 449.51 485.80 641.85 963.87 1421.26 2054.62 2874.59 3907.87 5135.85 6558.29 8166.73
Marketable securities, short-term 359.58 250.98 272.03 284.53 368.07 462.38 572.23 695.66 827.42 956.23 1086.62 1204.95 1265.19
Accounts receivable, net of allowance for doubtful accounts 158.55 247.42 322.83 401.96 519.99 653.24 808.42 982.79 1168.94 1350.91 1535.13 1702.29 1787.41
Inventories 19.47 27.13 31.69 42.38 54.83 68.88 85.24 103.63 123.25 142.44 161.87 179.49 188.47Prepaid expenses & other current assets 26.70 38.18 80.95 94.14 121.78 152.98 189.32 230.16 273.75 316.37 359.51 398.66 418.59Deferred tax assets - - - - - - - - - - - - -
Total current assets 732.01 952.98 1157.00 1308.81 1706.51 2301.35 3076.46 4066.85 5267.95 6673.82 8278.98 10043.68 11826.39Marketable securities, long-term 151.37 59.78 39.95 47.42 61.34 77.06 95.37 115.94 137.90 159.37 181.10 200.82 210.87
Property, plant & equipment, net of accumulated depreciation & amortizatio 136.47 175.17 348.79 428.09 516.04 603.13 691.69 766.94 820.50 857.93 904.45 960.34 1025.97Equity method investments - 45.06 54.61 54.61 54.61 54.61 54.61 54.61 54.61 54.61 54.61 54.61 54.61
Goodwill 61.07 61.04 64.61 64.61 64.61 64.61 64.61 64.61 64.61 64.61 64.61 64.61 64.61
intangible assets, net 18.09 20.95 24.45 97.97 107.77 118.55 130.40 143.44 157.79 173.57 190.93 210.02 231.02
Deferred tax assets 51.42 67.84 50.06 74.81 99.44 128.59 163.75 204.58 244.87 290.62 338.77 384.28 419.03
Other assets 8.20 13.32 38.38 18.35 23.73 29.81 36.90 44.86 53.35 61.66 70.06 77.69 81.58
Total assets 1158.63 1396.15 1777.86 2094.67 2634.06 3377.72 4313.80 5461.84 6801.58 8336.18 10083.52 11996.06 13914.07Liabilities and Shareholders' Equity: Accounts payable 34.35 28.60 36.78 55.67 72.02 90.48 111.97 136.12 161.90 187.11 212.63 235.78 247.57
Accrued liabilities 107.77 134.33 194.20 249.28 322.47 405.10 501.33 609.47 724.91 837.76 952.00 1055.66 1108.45
Deferred revenues 129.55 191.41 266.84 322.46 417.14 524.04 648.52 788.41 937.74 1083.72 1231.51 1365.60 1433.88
Total current liabilities 271.67 354.34 497.82 627.41 811.63 1019.61 1261.83 1534.00 1824.55 2108.59 2396.13 2657.05 2789.90
Income tax payable 37.51 45.13 114.09 71.18 94.62 122.36 155.82 194.66 233.00 276.53 322.35 365.66 398.72
Other long-term liabilities 1.52 1.29 15.58 26.79 34.65 43.53 53.87 65.49 77.90 90.03 102.30 113.44 119.11
Total liabilities 310.71 400.76 627.49 725.38 940.91 1185.51 1471.52 1794.16 2135.45 2475.15 2820.78 3136.14 3307.73Shareholders' EquityCommon stock & Additional paid-in capital 821.52 864.88 886.44 887.30 887.30 887.30 887.30 887.30 887.30 887.30 887.30 887.30 887.30
Treasury stock - - - -100.00 -200.00 -250.00 -300.00 -350.00 -400.00 -450.00 -500.00 -550.00 -600.00
Accumulated other comprehensive income (loss), net -0.98 -0.94 0.57 0.57 0.57 0.57 0.57 0.57 0.57 0.57 0.57 0.57 0.57
Retained earnings (accumulated deficit) 27.39 131.45 263.36 581.42 1005.29 1554.35 2254.42 3129.81 4178.27 5423.17 6874.87 8522.05 10318.47
Total stockholders' equity (deficit) 847.93 995.39 1150.37 1369.29 1693.15 2192.22 2842.28 3667.68 4666.13 5861.04 7262.73 8859.92 10606.34Total liabilities and stockholders' equity 1158.63 1396.15 1777.86 2094.67 2634.06 3377.72 4313.80 5461.84 6801.58 8336.18 10083.52 11996.06 13914.07
Align Technology, Inc.Income Statement[Currency : USD Million]Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E CV 2027
Net revenues 845.49 1079.87 1473.41 1896.84 2453.78 3082.56 3814.84 4637.70 5516.11 6374.84 7244.16 8032.97 8434.62
Costs of goods sold 205.38 264.58 356.47 474.21 613.44 770.64 953.71 1159.43 1379.03 1593.71 1811.04 2008.24 2108.65
Gross profit (loss) 640.11 815.29 1116.95 1422.63 1840.33 2311.92 2861.13 3478.28 4137.08 4781.13 5433.12 6024.73 6325.96
Depreciation expense 18.00 24.00 37.74 41.86 51.37 61.92 72.38 83.00 92.03 98.46 102.95 108.53 115.24
Amortization expense 2.60 3.17 5.10 8.91 9.80 10.78 11.85 13.04 14.34 15.78 17.36 19.09 21.00
Selling, general & administrative expenses 390.24 490.65 665.78 844.09 1079.66 1340.92 1640.38 1971.02 2344.34 2677.43 3006.33 3293.52 3373.85
Research & development expenses 61.24 75.72 97.56 130.88 169.31 212.70 263.22 320.00 380.61 439.86 499.85 554.27 581.99
Total operating expenses 451.48 566.37 763.34 1025.74 1310.14 1626.31 1987.84 2387.07 2831.33 3231.53 3626.48 3975.42 4092.08
Income (loss) from operations 188.63 248.92 353.61 396.89 530.19 685.61 873.30 1091.21 1305.75 1549.59 1806.64 2049.31 2233.88
Interest & other income (expense), net -2.53 -6.36 11.19 9.80 10.42 13.48 16.94 20.96 25.48 30.31 35.03 39.81 44.14
Net income (loss) before provision for income taxes 186.10 242.57 364.80 406.69 540.62 699.09 890.23 1112.17 1331.23 1579.90 1841.67 2089.11 2278.03Provision for (benefit from) income taxes 42.08 51.20 130.16 85.40 113.53 146.81 186.95 233.56 279.56 331.78 386.75 438.71 478.39
Equity in earnings (losses) of investee, net of tax - -1.68 -3.22 -3.22 -3.22 -3.22 -3.22 -3.22 -3.22 -3.22 -3.22 -3.22 -3.22
Net income (loss) 144.02 189.68 231.42 318.06 423.87 549.06 700.07 875.40 1048.45 1244.90 1451.70 1647.18 1796.42
Year end shares outstanding 79.50 79.55 80.04 79.75 79.33 79.14 78.96 78.80 78.65 78.51 78.39 78.27 78.16
Net income (loss) per share - basic 1.80 2.38 2.89 3.99 5.34 6.94 8.87 11.11 13.33 15.86 18.52 21.04 22.98
Align Technology, Inc.Cash Flow Statement[Currency : USD Million]Fiscal Years Ending Dec. 31 2015 2016 2017
CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss) 144.02 189.68 231.42
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred taxes -11.42 -16.40 17.57
Depreciation & amortization 18.00 24.00 37.74
Stock-based compensation 52.94 54.15 58.85
Net tax benefits (shortfalls) from stock-based awards 10.22 15.89 -
Excess tax provision for (benefit from) share-based payment arrangements -10.40 -16.77 -
Equity in losses of investee - 1.68 3.22
Other non-cash operating activities 13.80 12.03 13.85
Changes in assets and liabilities:
Accounts receivable -40.78 -94.44 -90.99
Inventories -3.56 -7.66 -5.48
Prepaid expenses & other current assets -3.73 - -
Prepaid expenses & other assets - -9.39 -8.67
Accounts payable 7.58 -3.40 8.18
Accrued liabilities & other long-term liabilities 19.46 37.63 24.24
Long-term income tax payable - - 68.96
Deferred revenues 41.85 60.66 79.66
Net cash flows from operating activities 238.00 247.65 438.54
CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition, net of cash acquired - - -8.95
Purchase of property, plant & equipment -53.45 -70.58 -195.70
Purchase of marketable securities -447.09 -405.61 -390.24
Proceeds from maturities of marketable securities 304.13 387.87 349.24
Purchase of equity method investments - -46.75 -12.76
Proceeds from sales of marketable securities 30.01 216.12 39.54
Loan advances to equity investee - - -36.00
Loan repayment from equity investee - - 6.00
Other investing activities 0.05 -8.21 0.57
Net cash flows from investing activities -166.36 72.85 -248.31
CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from issuance of common stock 11.33 13.78 14.46
Common stock repurchases -101.79 -96.22 -103.79
Excess tax provision for (benefit from) share-based payment arrangements 10.40 16.77 -
Employees' taxes paid upon the vesting of restricted stock units -20.72 -29.86 -46.17
Net cash flows from financing activities -100.79 -95.52 -135.50
Effect of foreign exchange rate changes on cash & cash equivalents -3.01 -3.42 5.51
Net increase (decrease) in cash & cash equivalents -32.16 221.56 60.24
Cash & cash equivalents, beginning of year 199.87 167.71 389.28
Cash & cash equivalents, end of year 167.71 389.28 449.51
Align Technology, Inc.Cash Flow Forecast[Currency : USD Million]Fiscal Years Ending Dec. 31 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E CV 2027
CASH FLOWS FROM OPERATING ACTIVITIES:Consolidated net income (loss) 318.06 423.87 549.06 700.07 875.40 1048.45 1244.90 1451.70 1647.18 1796.42
Adjusments to reconcile net income to net cash provided by operating activities:
Depreciation expense 41.86 51.37 61.92 72.38 83.00 92.03 98.46 102.95 108.53 115.24
Amortization expense 8.91 9.80 10.78 11.85 13.04 14.34 15.78 17.36 19.09 21.00
Changes in operating assets and liabilities:
Accounts receivable, net -79.14 -118.02 -133.25 -155.18 -174.37 -186.15 -181.98 -184.22 -167.16 -85.11
Inventory -10.70 -12.44 -14.05 -16.36 -18.39 -19.63 -19.19 -19.42 -17.63 -8.97
Deferred tax assets -24.75 -24.64 -29.15 -35.16 -40.82 -40.29 -45.74 -48.15 -45.52 -34.75
Prepaid expenses & other current assets -13.19 -27.64 -31.21 -36.34 -40.84 -43.59 -42.62 -43.14 -39.15 -19.93
Accounts payable 18.90 16.35 18.46 21.49 24.15 25.78 25.20 25.52 23.15 11.79
Accrued liabilities 55.08 73.19 82.63 96.23 108.14 115.44 112.85 114.24 103.66 52.78
Deferred revenues 55.62 94.68 106.89 124.49 139.89 149.33 145.98 147.78 134.10 68.28
Income tax payable -42.91 23.44 27.74 33.46 38.85 38.34 43.53 45.82 43.31 33.07
Net cash flows from operating activities 327.74 509.95 649.83 816.92 1008.04 1194.06 1397.19 1610.43 1809.58 1949.81
CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property, plant & equipment -121.15 -139.32 -149.01 -160.94 -158.25 -145.59 -135.89 -149.48 -164.42 -180.87
Purchase of intangible assets -82.43 -19.59 -21.55 -23.71 -26.08 -28.69 -31.56 -34.71 -38.19 -42.00
Purchase of Marketable securities, short-term -12.49 -83.54 -94.32 -109.84 -123.43 -131.76 -128.81 -130.40 -118.32 -60.25
Purchase of Marketable securities, long-term -7.47 -13.92 -15.72 -18.31 -20.57 -21.96 -21.47 -21.73 -19.72 -10.04
Purchase of other assets 20.03 -5.39 -6.08 -7.08 -7.96 -8.50 -8.31 -8.41 -7.63 -3.88
Net cash flows from investing activities -203.51 -261.77 -286.69 -319.88 -336.29 -336.50 -326.03 -344.73 -348.28 -297.04
CASH FLOWS FROM FINANCING ACTIVITIES:Change in other long-term liabilities 11.21 7.87 8.88 10.34 11.62 12.40 12.13 12.28 11.14 5.67
Purchase of treasury stock -100.00 -100.00 -50.00 -50.00 -50.00 -50.00 -50.00 -50.00 -50.00 -50.00
Issuance of common stock 0.85 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Net cash flows from financing activities -87.94 -92.13 -41.12 -39.66 -38.38 -37.60 -37.87 -37.72 -38.86 -44.33
Net increase (decrease) in cash & cash equivalents 36.29 156.05 322.02 457.39 633.36 819.96 1033.28 1227.98 1422.44 1608.44
Cash & cash equivalents at beginning of year 449.51 485.80 641.85 963.87 1421.26 2054.62 2874.59 3907.87 5135.85 6558.29
Cash & cash equivalents at end of year 485.80 641.85 963.87 1421.26 2054.62 2874.59 3907.87 5135.85 6558.29 8166.73
Align Technology, Inc.Common Size Income Statement[Currency : USD Million]Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E CV 2027
Net revenues 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Costs of goods sold 24.29% 24.50% 24.19% 25.00% 25.00% 25.00% 25.00% 25.00% 25.00% 25.00% 25.00% 25.00% 25.00%
Gross profit (loss) 75.71% 75.50% 75.81% 75.00% 75.00% 75.00% 75.00% 75.00% 75.00% 75.00% 75.00% 75.00% 75.00%Depreciation expense 2.13% 2.22% 2.56% 2.21% 2.09% 2.01% 1.90% 1.79% 1.67% 1.54% 1.42% 1.35% 1.37%
Amortization expense 0.31% 0.29% 0.35% 0.47% 0.40% 0.35% 0.31% 0.28% 0.26% 0.25% 0.24% 0.24% 0.25%
Selling, general & administrative expenses 46.16% 45.44% 45.19% 44.50% 44.00% 43.50% 43.00% 42.50% 42.50% 42.00% 41.50% 41.00% 40.00%
Research & development expenses 7.24% 7.01% 6.62% 6.90% 6.90% 6.90% 6.90% 6.90% 6.90% 6.90% 6.90% 6.90% 6.90%
Total operating expenses 53.40% 52.45% 51.81% 54.08% 53.39% 52.76% 52.11% 51.47% 51.33% 50.69% 50.06% 49.49% 48.52%
Income (loss) from operations 22.31% 23.05% 24.00% 20.92% 21.61% 22.24% 22.89% 23.53% 23.67% 24.31% 24.94% 25.51% 26.48%
Interest & other income (expense), net -0.30% -0.59% 0.76% 0.52% 0.42% 0.44% 0.44% 0.45% 0.46% 0.48% 0.48% 0.50% 0.52%
Net income (loss) before provision for income taxes 22.01% 22.46% 24.76% 21.44% 22.03% 22.68% 23.34% 23.98% 24.13% 24.78% 25.42% 26.01% 27.01%
Provision for (benefit from) income taxes 4.98% 4.74% 8.83% 4.50% 4.63% 4.76% 4.90% 5.04% 5.07% 5.20% 5.34% 5.46% 5.67%
Equity in earnings (losses) of investee, net of tax - -0.16% -0.22% -0.17% -0.13% -0.10% -0.08% -0.07% -0.06% -0.05% -0.04% -0.04% -0.04%
Net income (loss) 17.03% 17.57% 15.71% 16.77% 17.27% 17.81% 18.35% 18.88% 19.01% 19.53% 20.04% 20.51% 21.30%
Align Technology, Inc.Common Size Balance Sheet[Currency : USD Million]Fiscal Years Ending Dec. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E CV 2027
AssetsCash & cash equivalents 19.84% 36.05% 30.51% 25.61% 26.16% 31.27% 37.26% 44.30% 52.11% 61.30% 70.90% 81.64% 96.82%
Marketable securities, short-term 42.53% 23.24% 18.46% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00%
Accounts receivable, net of allowance for doubtful accounts 18.75% 22.91% 21.91% 21.19% 21.19% 21.19% 21.19% 21.19% 21.19% 21.19% 21.19% 21.19% 21.19%
Inventories 2.30% 2.51% 2.15% 2.23% 2.23% 2.23% 2.23% 2.23% 2.23% 2.23% 2.23% 2.23% 2.23%
Prepaid expenses & other current assets 3.16% 3.54% 5.49% 4.96% 4.96% 4.96% 4.96% 4.96% 4.96% 4.96% 4.96% 4.96% 4.96%
Total current assets 86.58% 88.25% 78.53% 69.00% 69.55% 74.66% 80.64% 87.69% 95.50% 104.69% 114.28% 125.03% 140.21%
Marketable securities, long-term 17.90% 5.54% 2.71% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50%
Property, plant & equipment, net of accumulated depreciation & amortization 16.14% 16.22% 23.67% 22.57% 21.03% 19.57% 18.13% 16.54% 14.87% 13.46% 12.49% 11.96% 12.16%
Equity method investments - 4.17% 3.71% 2.88% 2.23% 1.77% 1.43% 1.18% 0.99% 0.86% 0.75% 0.68% 0.65%
intangible assets, net 2.14% 1.94% 1.66% 5.17% 4.39% 3.85% 3.42% 3.09% 2.86% 2.72% 2.64% 2.61% 2.74%
Deferred tax assets 6.08% 6.28% 3.40% 3.94% 4.05% 4.17% 4.29% 4.41% 4.44% 4.56% 4.68% 4.78% 4.97%
Other assets 0.97% 1.23% 2.60% 0.97% 0.97% 0.97% 0.97% 0.97% 0.97% 0.97% 0.97% 0.97% 0.97%
Total assets 137.04% 129.29% 120.66% 110.43% 107.35% 109.58% 113.08% 117.77% 123.30% 130.77% 139.20% 149.34% 164.96%Liabilities and Shareholders' Equity: Accounts payable 4.06% 2.65% 2.50% 2.94% 2.94% 2.94% 2.94% 2.94% 2.94% 2.94% 2.94% 2.94% 2.94%
Accrued liabilities 12.75% 12.44% 13.18% 13.14% 13.14% 13.14% 13.14% 13.14% 13.14% 13.14% 13.14% 13.14% 13.14%
Deferred revenues 15.32% 17.72% 18.11% 17.00% 17.00% 17.00% 17.00% 17.00% 17.00% 17.00% 17.00% 17.00% 17.00%
Total current liabilities 32.13% 32.81% 33.79% 33.08% 33.08% 33.08% 33.08% 33.08% 33.08% 33.08% 33.08% 33.08% 33.08%
Income tax payable 4.44% 4.18% 7.74% 3.75% 3.86% 3.97% 4.08% 4.20% 4.22% 4.34% 4.45% 4.55% 4.73%
Other long-term liabilities 0.18% 0.12% 1.06% 1.41% 1.41% 1.41% 1.41% 1.41% 1.41% 1.41% 1.41% 1.41% 1.41%
Total liabilities 36.75% 37.11% 42.59% 38.24% 38.35% 38.46% 38.57% 38.69% 38.71% 38.83% 38.94% 39.04% 39.22%Shareholders' EquityCommon stock & Additional paid-in capital 97.16% 80.09% 60.16% 46.78% 36.16% 28.78% 23.26% 19.13% 16.09% 13.92% 12.25% 11.05% 10.52%
Accumulated other comprehensive income (loss), net -0.12% -0.09% 0.04% 0.03% 0.02% 0.02% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01%
Retained earnings (accumulated deficit) 3.24% 12.17% 17.87% 30.65% 40.97% 50.42% 59.10% 67.49% 75.75% 85.07% 94.90% 106.09% 122.33%
Total stockholders' equity (deficit) 100.29% 92.18% 78.08% 72.19% 69.00% 71.12% 74.51% 79.08% 84.59% 91.94% 100.26% 110.29% 125.75%Total liabilities and stockholders' equity 137.04% 129.29% 120.66% 110.43% 107.35% 109.58% 113.08% 117.77% 123.30% 130.77% 139.20% 149.34% 164.96%
Align Technology, Inc.Weighted Average Cost of Capital (WACC) Estimation[Currency : USD Million]
Cost of EquityBeta(5Yr Weekly) 1.597Risk-Free Rate 3.15%Market Risk Premium 5.32%Cost of Equity 11.65%
Cost of DebtPre-Tax Cost of Debt 6.00%Tax Rate 21.00%After Tax Cost of Debt 4.74%
Market Value of EquityShare Price $217.29Share Outstanding 80.04Market Value of Equity $17,391.89
Market Value Of DebtPV Operating Leases $51.54Market Value Of Debt $51.54
Weights% Equity 99.70%
Align Technology, Inc.Value Driver Estimation[Currency : USD Million]Fiscal Years Ending Dec. 31 2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E CV 2027
NOPLAT ComputationEBITA:Net Sales 761.65 845.49 1079.87 1473.41 1896.84 2453.78 3082.56 3814.84 4637.70 5516.11 6374.84 7244.16 8032.97 8434.62
-Cost of Products Sold 183.21 205.38 264.58 356.47 474.21 613.44 770.64 953.71 1159.43 1379.03 1593.71 1811.04 2008.24 2108.65
-Depreciation Expense 17.86 18.00 24.00 37.74 41.86 51.37 61.92 72.38 83.00 92.03 98.46 102.95 108.53 115.24
-Selling, general & administrative expenses 332.07 390.24 490.65 665.78 844.09 1079.66 1340.92 1640.38 1971.02 2344.34 2677.43 3006.33 3293.52 3373.85
-Research & development expenses 52.80 61.24 75.72 97.56 130.88 169.31 212.70 263.22 320.00 380.61 439.86 499.85 554.27 581.99
+Implied Interest on Operating Leases 1.47 1.24 1.07 2.69 3.09 3.87 4.75 5.71 6.73 7.74 8.67 9.54 10.49 11.54
EBITA 177.19 171.87 225.99 318.57 408.89 543.85 701.14 890.86 1110.98 1327.83 1574.04 1833.53 2078.89 2266.43
Less: Adjusted Taxes:Provision for Income Taxes 44.54 42.08 51.20 130.16 85.40 113.53 146.81 186.95 233.56 279.56 331.78 386.75 438.71 478.39
+Tax Shield on Implied Lease Interest 0.31 0.26 0.23 0.57 0.65 0.81 1.00 1.20 1.41 1.63 1.82 2.00 2.20 2.42
- Tax on Interest Income/ + Tax on Interest Expense" 0.67 0.53 1.33 -2.35 -2.06 -2.19 -2.83 -3.56 -4.40 -5.35 -6.37 -7.36 -8.36 -9.27
Adjusted Taxes 45.52 42.87 52.76 128.38 84.00 112.15 144.98 184.59 230.57 275.83 327.24 381.40 432.56 471.54
Plus:Change in Deferred Tax(DT)Current Year DT Asset 37.05 - - - - - - - - - - - - -+DT Long-Term Assets 3.10 51.42 67.84 50.06 74.81 99.44 128.59 163.75 204.58 244.87 290.62 338.77 384.28 419.03Net DT Assets 40.15 51.42 67.84 50.06 74.81 99.44 128.59 163.75 204.58 244.87 290.62 338.77 384.28 419.03Net Change in DT(Current Yr - Previous Yr) 24.39 -11.26 -16.43 17.79 -24.75 -24.64 -29.15 -35.16 -40.82 -40.29 -45.74 -48.15 -45.52 -34.75
NOPLAT: EBITA - Adjusted Taxes + Δ in DT 156.06 117.73 156.80 207.97 300.14 407.07 527.01 671.11 839.59 1011.71 1201.07 1403.99 1600.82 1760.14
Invested Capital ComputationOperating Current Assets:
Normal Cash 33.01 38.08 42.27 53.99 73.67 94.84 122.69 154.13 190.74 231.89 275.81 318.74 362.21 401.65
Accounts Receivable, Net 129.75 158.55 247.42 322.83 401.96 519.99 653.24 808.42 982.79 1168.94 1350.91 1535.13 1702.29 1787.41
Inventory 15.93 19.47 27.13 31.69 42.38 54.83 68.88 85.24 103.63 123.25 142.44 161.87 179.49 188.47
Prepaid expenses & other current assets 19.77 26.70 38.18 80.95 94.14 121.78 152.98 189.32 230.16 273.75 316.37 359.51 398.66 418.59
Operating Current Assets 198.46 242.80 355.00 489.45 612.16 791.43 997.79 1237.11 1507.32 1797.83 2085.53 2375.26 2642.65 2796.12
Operating Current Liabilities:Accounts Payable 23.25 34.35 28.60 36.78 55.67 72.02 90.48 111.97 136.12 161.90 187.11 212.63 235.78 247.57
Accrued Expenses 87.88 107.77 134.33 194.20 249.28 322.47 405.10 501.33 609.47 724.91 837.76 952.00 1055.66 1108.45Deferred Revenue 90.68 129.55 191.41 266.84 322.46 417.14 524.04 648.52 788.41 937.74 1083.72 1231.51 1365.60 1433.88
Operating Current Liabilities 201.81 271.67 354.34 497.82 627.41 811.63 1019.61 1261.83 1534.00 1824.55 2108.59 2396.13 2657.05 2789.90
Net Operating Working Capital -3.35 -28.87 0.66 -8.36 -15.26 -20.20 -21.83 -24.72 -26.68 -26.72 -23.06 -20.88 -14.39 6.22
Operating LT Assets:Net Intangible assets 20.69 18.09 20.95 24.45 97.97 107.77 118.55 130.40 143.44 157.79 173.57 190.93 210.02 231.02
Present value of operating leases 20.69 17.88 44.91 51.54 64.43 79.24 95.09 112.21 129.04 144.53 158.98 174.88 192.36 196.21
Other assets 7.67 8.20 13.32 38.38 18.35 23.73 29.81 36.90 44.86 53.35 61.66 70.06 77.69 81.58
Operating L-T Assets 49.05 44.17 79.19 114.37 180.75 210.75 243.46 279.51 317.34 355.67 394.20 435.87 480.08 508.81
Operating LT Liabilities:Income tax payable 30.48 37.51 45.13 114.09 71.18 94.62 122.36 155.82 194.66 233.00 276.53 322.35 365.66 398.72Other liabilities 2.93 1.52 1.29 15.58 26.79 34.65 43.53 53.87 65.49 77.90 90.03 102.30 113.44 119.11
Operating L-T Liabilities 33.42 39.04 46.43 129.67 97.97 129.28 165.89 209.69 260.16 310.90 366.56 424.65 479.10 517.84Net Other Operating Working Capital 15.63 5.14 32.76 -15.30 82.78 81.47 77.56 69.82 57.18 44.76 27.65 11.22 0.98 -9.03
Plus: Net PPE 90.13 136.47 175.17 348.79 428.09 516.04 603.13 691.69 766.94 820.50 857.93 904.45 960.34 1025.97
Invested Capital : 102.41 112.73 208.59 325.14 495.61 577.32 658.87 736.79 797.44 838.55 862.52 894.79 946.93 1023.16
Value Drivers:
ROICNOPLAT 156.06 117.73 156.80 207.97 300.14 407.07 527.01 671.11 839.59 1011.71 1201.07 1403.99 1600.82 1760.14
Beg IC 137.14 102.41 112.73 208.59 325.14 495.61 577.32 658.87 736.79 797.44 838.55 862.52 894.79 946.93
ROIC 114% 115% 139% 100% 92% 82% 91% 102% 114% 127% 143% 163% 179% 186%
EPBeg IC 137.14 102.41 112.73 208.59 325.14 495.61 577.32 658.87 736.79 797.44 838.55 862.52 894.79 946.93
ROIC-WACC 1.02 1.03 1.27 0.88 0.81 0.71 0.80 0.90 1.02 1.15 1.32 1.51 1.67 1.74
EP 140.11 105.83 143.70 183.72 262.35 349.45 459.90 594.51 753.93 919.00 1103.58 1303.71 1496.79 1650.05
FCFNOPLAT 156.06 117.73 156.80 207.97 300.14 407.07 527.01 671.11 839.59 1011.71 1201.07 1403.99 1600.82 1760.14
-Capex -34.74 10.33 95.85 116.55 170.47 81.71 81.55 77.93 60.65 41.10 23.97 32.28 52.13 76.23
FCF 190.80 107.41 60.95 91.42 129.67 325.36 445.47 593.18 778.94 970.60 1177.09 1371.71 1548.68 1683.91
Align Technology, Inc.Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models
Key Inputs:
CV Growth 5.00%
CV ROIC 190%
WACC 11.63%
Cost of Equity 11.65%
Fiscal Years Ending Dec. 31 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E CV 2027
DCF ModelNOPLAT 300.14 407.07 527.01 671.11 839.59 1011.71 1201.07 1403.99 1600.82 1760.14
- CapEx 170.47 81.71 81.55 77.93 60.65 41.10 23.97 32.28 52.13 76.23
Unlevered Free Cash Flow 129.67 325.36 445.47 593.18 778.94 970.60 1177.09 1371.71 1548.68 1683.91
Continuing Value 25866.50
CF to Discount 129.67 325.36 445.47 593.18 778.94 970.60 1177.09 1371.71 1548.68 25866.50
Present Value of FCF 116.17 261.12 320.27 382.06 449.45 501.72 545.08 569.05 575.56 9613.07
Present Value of Stage 1 CFs 3720.47Present Value of CV 9613.07Value of Operating Assets 13333.55
Plus:Excess Cash 395.52
Plus: Marketable securities 311.98
Plus: Equity method investments 54.61
Less: PV Operating Leases -52
Less: ESOP -22.88
Value of Equity 14021.23
Shares Outstanding 80.04
Intrinsic Value of Equity 175.18
EP ModelNOPLAT 300.14 407.07 527.01 671.11 839.59 1011.71 1201.07 1403.99 1600.82 1760.14
Beg. IC 325.14 495.61 577.32 658.87 736.79 797.44 838.55 862.52 894.79 946.93
ROIC 92% 82% 91% 102% 114% 127% 143% 163% 179% 186%
WACC 11.63% 11.63% 11.63% 11.63% 11.63% 11.63% 11.63% 11.63% 11.63% 11.63%
EP 262.35 349.45 459.90 594.51 753.93 919.00 1103.58 1303.71 1496.79 1650.05Continuing Value 24919.57
Discounting:Beg. IC 325.14
EP to Discount 262.35 349.45 459.90 594.51 753.93 919.00 1103.58 1303.71 1496.79 24919.57
Present Value of EP 235.02 280.45 330.65 382.92 435.02 475.04 511.04 540.84 556.27 9261.15
Present Value of Stage 1 EPs 3747.26Present Value of CV 9261.15
Beginning IC 2017 325.14Value of Operating Assets 13333.55
Plus:Excess Cash 395.517
Plus: Marketable Securities 311.979
Plus: Equity Method Investment 54.606
Less: PV Operating Leases -51.54
Less: ESOP -22.88
Value of Equity 14021.23
Shares Outstanding 80.04
Intrinsic Value of Equity 175.18
For Discounting:
Number of Periods 1 2 3 4 5 6 7 8 9 9
Model Date 11/13/2018
Next FYE 12/31/2018
Last FYE 12/31/2017
Days in FY 365
Days to FYE 317
Elapsed Fraction 0.868
Adjusted Target Price 192.77
Align Technology, Inc.Dividend Discount Model (DDM) or Fundamental P/E Valuation Model
Fiscal Years Ending 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E
EPS 3.99$ 5.34$ 6.94$ 8.87$ 11.11$ 13.33$ 15.86$ 18.52$ 21.04$ 22.98$
Key Assumptions CV growth 5.00%
CV ROE 16.94%
Cost of Equity 11.65%
Future Cash Flows P/E Multiple (CV Year) 10.60
EPS (CV Year) 22.98
Future Stock Price 243.72
Future Cash Flows 243.72
Discounted Cash Flows 90.43$
Current forward P/E Multiple 36.64
Current share price $217.29
Intrinsic Value 90.43$
For Discounting:
Number of Periods 1 2 3 4 5 6 7 8 9 9
Model Date 11/13/2018
Next FYE 12/31/2018
Last FYE 12/31/2017
Days in FY 365
Days to FYE 317
Elapsed Fraction 0.868Adjusted Target Price $ 99.51
Align Technology, Inc.Relative Valuation Models
EPS EPS
Ticker Company Price 2018E 2019E P/E 18 P/E 19
DHR Danaher Corporation $97.14 $4.51 $4.84 21.54 20.07
XRAY DENTSPLY Sirona, Inc. $34.33 ($4.08) $1.62 - 21.19
HSIC Henry Schein, Inc. $79.93 $3.85 $4.47 20.76 17.88
PDCO Patterson Companies, Inc. $22.78 $0.94 $1.30 24.23 17.52 ZBH Zimmer Biomet Holding, Inc. $115.13 $4.41 $5.40 26.11 21.32
Average 23.16 19.60
ALGN Align Technology, Inc. $217.29 $3.99 $5.34 54.5 40.7
Implied Relative Value: P/E (EPS18) $ 92.36 P/E (EPS19) 104.71$
Align Technology, Inc.Key Management Ratios
Fiscal Years Ending 2015 2016 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E
Liquidity RatiosCurrent Ratio (Current Assets / Current Liabilities) 2.69 2.69 2.32 2.09 2.10 2.26 2.44 2.65 2.89 3.17 3.46 3.78 4.24Quick Ratio ((Cash + A/R) / Current Liabilities) 1.20 1.80 1.55 1.41 1.43 1.59 1.77 1.98 2.22 2.49 2.78 3.11 3.57Cash Ratio (Cash / Current Liabilities) 0.62 1.10 0.90 0.77 0.79 0.95 1.13 1.34 1.58 1.85 2.14 2.47 2.93
Activity or Asset-Management RatiosTotal Assets Turnover (Sales / Total Asses) 0.73 0.77 0.83 0.91 0.93 0.91 0.88 0.85 0.81 0.76 0.72 0.67 0.61Fixed Assets Turnover (Sales / Fixed Assets) 6.20 6.16 4.22 4.43 4.76 5.11 5.52 6.05 6.72 7.43 8.01 8.36 8.22Inventory Turnover (Cost-of Good Sold / Average Inventory) 11.61 11.36 12.12 12.80 12.62 12.46 12.38 12.28 12.16 12.00 11.90 11.77 11.46
Financial Leverage RatiosDebt-to-Equity (Total Liabilities / Stockholder's Equity) 0.37 0.40 0.55 0.53 0.56 0.54 0.52 0.49 0.46 0.42 0.39 0.35 0.31Equity Ratio ( Total Equity / Total Assets) 0.73 0.71 0.65 0.65 0.64 0.65 0.66 0.67 0.69 0.70 0.72 0.74 0.76
Profitability RatiosGross Margin (Gross Profit / Sales) 75.71% 75.50% 75.81% 75.00% 75.00% 75.00% 75.00% 75.00% 75.00% 75.00% 75.00% 75.00% 75.00%Operating Margin (Operating income / Sales) 22.31% 23.05% 24.00% 20.92% 21.61% 22.24% 22.89% 23.53% 23.67% 24.31% 24.94% 25.51% 26.48%Pretax Margin (Pretax income / Sales) 22.01% 22.46% 24.76% 21.44% 22.03% 22.68% 23.34% 23.98% 24.13% 24.78% 25.42% 26.01% 27.01%Net Profit Margin (Net income / Sales) 17.03% 17.57% 15.71% 16.77% 17.27% 17.81% 18.35% 18.88% 19.01% 19.53% 20.04% 20.51% 21.30%Return on Assets (Net Income / Average Total Assets) 13.42% 14.85% 14.58% 16.43% 17.93% 18.27% 18.20% 17.91% 17.10% 16.45% 15.76% 14.92% 13.87%Return on Equity ( Net income / Stockholder's Equity) 16.98% 19.06% 20.12% 23.23% 25.03% 25.05% 24.63% 23.87% 22.47% 21.24% 19.99% 18.59% 16.94%
Payout Policy RatiosEarnings Per Share (Net income / Average number of common shares outstanding) 1.80 2.38 2.89 3.99 5.34 6.94 8.87 11.11 13.33 15.86 18.52 21.04 22.98
Sensitivity Analysis
Share Price CV Growth of NOPLAT Share Price CV SG&A (% of Sales)
192.77$ 4.25% 4.50% 4.75% 5.00% 5.25% 5.50% 5.75% 192.77$ 37.00% 38.00% 39.00% 40.00% 41.00% 42.00% 43.00%
2.70% 192.00 196.97 202.32 208.10 214.37 221.19 228.63 5.40% 215.41 211.57 207.73 203.89 200.06 196.22 192.38
2.85% 187.52 192.22 197.28 202.74 208.65 215.06 222.05 5.90% 211.70 207.86 204.02 200.19 196.35 192.51 188.67
3.00% 183.23 187.69 192.48 197.63 203.21 209.25 215.81 6.40% 207.99 204.15 200.31 196.48 192.64 188.80 184.96
Risk Free 3.15% 179.11 183.35 187.88 192.77 198.03 203.72 209.90 6.90% 204.28 200.44 196.60 192.77 188.93 185.09 181.25
3.30% 175.17 179.19 183.50 188.12 193.09 198.47 204.28 7.40% 200.57 196.73 192.89 189.06 185.22 181.38 177.54
3.45% 171.38 175.21 179.29 183.68 188.39 193.46 198.95 7.90% 196.86 193.02 189.19 185.35 181.51 177.67 173.83
3.60% 167.75 171.38 175.27 179.43 183.89 188.69 193.87 8.40% 193.15 189.31 185.48 181.64 177.80 173.96 170.12
Share Price Beta Share Price CV ROIC Growth
192.77$ 1.30 1.40 1.50 1.60 1.70 1.80 1.90 192.77$ 160.00% 170.00% 180.00% 190.00% 200.00% 210.00% 220.00%
4.72% 309.98 277.06 250.16 228.41 208.91 192.77 178.82 3.00% 191.81 192.06 192.28 192.48 192.66 192.82 192.97
4.92% 290.99 260.48 235.49 215.23 197.04 181.96 168.91 4.00% 191.91 192.15 192.38 192.57 192.75 192.91 193.06
5.12% 274.08 245.68 222.36 203.42 186.38 172.23 159.98 5.00% 192.00 192.25 192.47 192.67 192.85 193.01 193.16
5.32% 258.93 232.39 210.54 192.77 176.75 163.44 151.90 6.00% 192.10 192.35 192.57 192.77 192.94 193.11 193.25
5.52% 245.28 220.39 199.85 183.12 168.02 155.46 144.55 7.00% 192.19 192.44 192.66 192.86 193.04 193.20 193.35
5.72% 232.93 209.50 190.14 174.34 160.07 148.18 137.85 8.00% 192.29 192.54 192.76 192.96 193.14 193.30 193.44
5.92% 221.70 199.58 181.27 166.32 152.79 141.52 131.72 9.00% 192.38 192.63 192.85 193.05 193.23 193.39 193.54
Share Price Marginal Tax Rate
192.77$ 18.00% 19.00% 20.00% 21.00% 22.00% 23.00% 24.00%
23.50% 212.00 209.30 206.60 203.89 201.19 198.49 195.79
24.00% 208.14 205.49 202.84 200.19 197.53 194.88 192.23
24.50% 204.28 201.68 199.08 196.48 193.87 191.27 188.67
25.00% 200.43 197.87 195.32 192.77 190.21 187.66 185.10
25.50% 196.57 194.07 191.56 189.06 186.55 184.04 181.54
26.00% 192.72 190.26 187.80 185.35 182.89 180.43 177.97
26.50% 188.86 186.45 184.05 181.64 179.23 176.82 174.41
CV R&D (%
of Sales)
Market Risk
Premium
Cost of
Goods Sold
(% of Sales)
Pre-Tax Cost
of Debt
Present Value of Operating Lease Obligations (2017) Present Value of Operating Lease Obligations (2016) Present Value of Operating Lease Obligations (2015)
Operating Operating Operating
Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending Dec. 31 Leases
2018 14799 2017 12880 2016 10236
2019 13260 2018 10338 2017 6078
2020 9759 2019 8466 2018 2475
2021 8137 2020 6849 2019 527
2022 6027 2021 6247 2020 326
Thereafter 9573 Thereafter 9141 Thereafter 108
Total Minimum Payments 61555 Total Minimum Payments 53921 Total Minimum Payments 19750
Less: Interest 10014 Less: Interest 9009 Less: Interest 1869
PV of Minimum Payments 51541 PV of Minimum Payments 44912 PV of Minimum Payments 17881
Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases
Pre-Tax Cost of Debt 6.00% Pre-Tax Cost of Debt 6.00% Pre-Tax Cost of Debt 6.00%
Number Years Implied by Year 6 Payment 1.6 Number Years Implied by Year 6 Payment 1.5 Number Years Implied by Year 6 Payment 1.0
Lease PV Lease Lease PV Lease Lease PV Lease
Year Commitment Payment Year Commitment Payment Year Commitment Payment
1 14799 13961.3 1 12880 12150.9 1 10236 9656.6
2 13260 11801.4 2 10338 9200.8 2 6078 5409.4
3 9759 8193.8 3 8466 7108.2 3 2475 2078.1
4 8137 6445.3 4 6849 5425.0 4 527 417.4
5 6027 4503.7 5 6247 4668.1 5 326 243.6
6 & beyond 6027 6635.3 6 & beyond 6247 6358.7 6 & beyond 108 76.1
PV of Minimum Payments 51540.8 PV of Minimum Payments 44911.8 PV of Minimum Payments 17881.2
Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding
Number of Options Outstanding (shares): 75Average Time to Maturity (years): 0.93Expected Annual Number of Options Exercised: 81
Current Average Strike Price: 11.36$ Cost of Equity: 9.00%Current Stock Price: $217.29
2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027EIncrease in Shares Outstanding: 75,000Average Strike Price: 11.36$ Increase in Common Stock Account: 852,000
Change in Treasury Stock 100,000,000 100,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000Expected Price of Repurchased Shares: 217.29$ 236.85$ 258.16$ 281.40$ 306.72$ 334.33$ 364.42$ 397.21$ 432.96$ 471.93$ Number of Shares Repurchased: 460,214 422,215 193,677 177,685 163,014 149,554 137,205 125,877 115,483 105,948
Shares Outstanding (beginning of the year) 80,140,000 79,754,786 79,332,570 79,138,894 78,961,209 78,798,195 78,648,641 78,511,436 78,385,559 78,270,076Plus: Shares Issued Through ESOP 75,000 0 0 0 0 0 0 0 0 0Less: Shares Repurchased in Treasury 460,214 422,215 193,677 177,685 163,014 149,554 137,205 125,877 115,483 105,948 Shares Outstanding (end of the year) 79,754,786 79,332,570 79,138,894 78,961,209 78,798,195 78,648,641 78,511,436 78,385,559 78,270,076 78,164,128
VALUATION OF OPTIONS GRANTED IN ESOP
Ticker Symbol ALGNCurrent Stock Price $316.13Risk Free Rate 3.15%Current Dividend Yield 0.00%Annualized St. Dev. of Stock Returns 39.48%
Average Average B-S ValueRange of Number Exercise Remaining Option of OptionsOutstanding Options of Shares Price Life (yrs) Price GrantedRange 1 75,000 11.36 0.93 305.10$ 22,882,347$ Total 75,000 11.36$ 0.93 305.10$ 22,882,347$