Unscrambling Monday's Egg

Unscrambling Align Technology, Inc. (Nasdaq: ALGN)

Giving Align a Check-Up using the Chicks' Dozen
by Chick Karin

NOTE: For the month of June, we will be going into detail on the companies that we recently considered for our quarterly Chick "buy." June was the month of buying. We ended up purchasing stock in Medtronic (MDT) on June 3, 2001, but there were many many great companies that didn't get our majority vote. We wanted to highlight them as it was a close call and they are still up for consideration for our next buy in September. For more on the companies that were considered, and what we'll be featuring all month, check out our summary.

1. Buy What You Know  I just got home from the orthodontist this afternoon. I see him more than I see my husband, as all four of our kids are patients of his. Today we had a long meeting about the future of my kids' cuspeds and what the next step should be in their treatment. (I'm moving to Minnesota and need to get a new ortho who will continue with a similar plan.) My oldest is nearing the end of her treatment, my second daughter is in the middle of her treatment, my son is just beginning, and the three year old has an under-crossbite that will require some adjustments even before the braces. Because I'm sure I've financed a new addition to his home, I kept Dr. Robertson longer and asked him about the latest technology in braces, the Invisalign System, or invisible braces from Align Technology. Chick Susie did the Chicks Dozen on Align as she proposed it for our last buy and this was my introduction to Align even being a public company. Being a Chick, I had to dig deeper and inquire with a doctor himself as to what he thought of it.

2. Keep it Simple Sister  Simply put, this system straightens teeth without metal braces. Invisalign uses a series of clear, removable aligners to gradually straighten teeth. The aligners are made of a strong medical grade of plastic that is virtually invisible. Surely you've seen the commercials about the blind date. What I learned from Dr. Robertson though is, it's not the be-all end-all answer to orthodontic treatment. In essence, Align is the Keep It Simple answer to braces. If you have a little protrusion here, or a crooked eyetooth there, Invisalign can fix it. But, if you have an underbite, overbite, crossbite, or your mouth is just too narrow for all your teeth, Align isn't always the answer. None of my kids were candidates for the invisible braces, as they needed re-alignment of their profile, jaw and bite (very similar to their mother years ago). But, for adults with simple corrections, Align is the least embarrassing solution.

3. Industry  There is no other company that has developed or is marketing a system comparable to the Invisalign System. There have been others through out the years, but all of them have failed to become viable or successful and ended up clenching their jaws in an effort to stay afloat. Invisalign does compete for the attention of orthodontists and companies who are accustomed to a more traditional metal bracket methodology. Such companies are Apogent Technologies, Dentsply International, Inc. Sybron International Corporation and 3M. The competition does not have the system nor the patents and business model that Align Technology, Inc. does. To learn more about Align, check out an account of "Invisible Orthodontist's" tour of the company.

4. Leader in its Field  Yes they are the only child at the top of their class and just last month they secured two more US patents. The new patents cover the fundamental technology of Invisalign System using less material for aligner mold fabrication, promising a cost savings on manufacturing while the second is an extension of Align's first patent. It covers the making of aligners individually or insets from digital models customized for each patient. They have approximately 15,000 patients who have completed the remedy, and 3,000 orthodontists who are trained and using the treatment.

5. Repeat Profitability  Invisalign uses a 3-D imaging technology to depict the complete treatment plan from the initial position to the final desired position. Each "aligner" moves teeth incrementally and is worn for two weeks, then replaced by the next in the series. That's means a new aligner every two weeks during treatment. As the technology becomes cheaper (currently it can cost as much as $6,000) they will probably get more and more customers who need slight adjustments.

The financials for Align do not meet all of our Chick criteria, but it also isn't a large cap company with years of experience and revenues behind it. If you've noticed, most of our companies have been around a long time. Susie proposed Align because it was a company she was interested in. She ran it through the Chicks Dozen and understood why it didn't meet some of the criteria. (She also bought a few shares for herself.) Here are the numbers that I got from the Annual Balance Sheet and Income Statement (in millions of US dollars).

6. Gross Margin:  (Revenues - Cost of Revenues) / Sales

(6.7 - 20.3) / 6.7
-13.5/ 6.7 = -2.01
2.01 x 100 = -201%

Doesn't make the Chicks grade of 50% here, but again, they want to get you hooked, then figure out a way to make it cheaper. The company is projected to be profitable in the next year. They just went public in January 2001.

7. Net Margin: Net Income / Sales

-88.7 / 6.7 = -13.2
-13.2 x 100 = -132%

Again, doesn't cut it by the Chicks standard of 8%, but it can't be as bad as having to wear head gear for a year.

8. Cash to Long Term Debt

Cash = 12.5, Long Term Debt = 1.5

12.5 / 1.5 = 8.3

Things are getting straighter! They have 8 times the amount of cash as they do long term debt. (We like companies with at least as much cash as long term debt. They have 8 times more!)

9. Flow Ratio

(Current Assets - Cash ) / Current Liabilities - Short Term Debt

(41.4 - 12.5) / (23.1 - 0) = 1.25

Perfect Smile!!! (We want 1.5 or less.)

10. Increasing Growth 120% from previous quarter!!
If we look at how the company sales have increased quarter-to-quarter, things are far from being gapped toothed. (In millions of US dollars)

11. Management  The CEO, Zia Chishti is one of the founders. He worked at Morgan Stanley in their investment banking division. Holds an MBA from Standard's Graduate School of Business and his BS and BA from Columbia University. I have no idea what his teeth look like.

President Kelsey Wirth is another founder. She also has her MBA from Stanford and a BA from Harvard. Previously, she has worked for the Environmental Working Group and World Resources Institute as an environmental consultant.

12. Buy on Sale
Current Price: 7.70
Sale Price: 12.39... It's on sale!

The company had their IPO on January 26, 2001 and has since fallen approximately 60% off its highs. If you are willing to track this company, keep up to date on their financials and news releases and are willing to incur some risk, this might be a company for you. (But being a Chick you might also want inquire with a local orthodontist.) We'll have Chick Susie check back with us in a year and see what movement she's had... hopefully everything will be in perfect alignment!