Standing out among the Street's worst performers today is Align Technology, a medical devices company whose shares slumped -18.3% to a price of $181.07, 40.18% below its average analyst target price of $302.7.
The average analyst rating for the stock is buy. ALGN lagged the S&P 500 index by -18.0% so far today and by -48.3% over the last year, returning -64.9%.
Align Technology, Inc., a medical device company, designs, manufactures, and markets Invisalign clear aligners and iTero intraoral scanners and services for orthodontists and general practitioner dentists, and restorative and aesthetic dentistry. The company is categorized within the healthcare sector. The catalysts that drive valuations in this sector are complex. From demographics, regulations, scientific breakthroughs, to the emergence of new diseases, healthcare companies see their prices swing on the basis of a variety of factors.
Align Technology's trailing 12 month P/E ratio is 22.5, based on its trailing Eps of $8.04. The company has a forward P/E ratio of 18.1 according to its forward Eps of $10.02 -- which is an estimate of what its earnings will look like in the next quarter. As of the third quarter of 2022, the average Price to Earnings (P/E) ratio for US healthcare companies is 13.21, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (Eps), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
A significant limitation with the price to earnings analysis is that it doesn’t account for investors’ growth expectations in the company. For example, a company with a low P/E ratio may not actually be a good value if it has little growth potential. Conversely, companies with high P/E ratios may be fairly valued in terms of growth expectations.
When we divide Align Technology's P/E ratio by its projected 5 year earnings growth rate, we see that it has a Price to Earnings Growth (PEG) ratio of 0.6. This tells us that the company is largely undervalued in terms of growth expectations -- but remember, these growth expectations could turn out to be wrong!
To get a sense of the company's long term profitability and market position, we can analyze its operating margins, which are the ratio of its net profits to its revenues. Over the last four years, Align Technology's operating margins have averaged 21.4% and displayed a mean growth rate of 7.0%. These numbers show that the company has a relatively strong footing.
Companies have many costs that arise independently from their core business: cost of maintaining debt, rent payments, capital expenditures, depreciation, etc. When all of these separate cash flows are taken into account, we are left with the company's free cash flow, which for Align Technology was $771,446,000.00 as of its last annual report.
This represents the amount of money that is available for reinvesting in the business, or for paying out to investors in the form of a dividend. With its strong cash flows, ALGN is in a position to do either -- which can encourage more investors to place their capital in the company. Over the last four years, the company's free cash flow has been growing at a rate of 39.1% and has on average been $551,909,000.00.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method. Align technology's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 3.9, but is still below the average P/B ratio of the Healthcare sector, which stood at 4.07 as of the third quarter of 2022.
Align Technology is likely fairly valued at today's prices because it has an inflated P/E ratio, a lower P/B ratio than the sector average, and a steady stream of strong cash flows with an upwards trend. The stock has mixed growth indicators because of its decent and consistent operating margins that are stable, and a PEG ratio of less than 1. We hope this preliminary analysis will encourage you to do your own research into ALGN's fundamental values -- especially their trends over the last few years, which provide the clearest picture of the company's valuation.
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