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  • 1. CFA Institute Research ChallengeAmericas Regional Competition SCU Leavey School of Business ALIGN TECHNOLOGIES (ALGN) TEAM Santa Clara University Amar | Spencer | Gio | Mona | Jaden SCU Confidential
  • 2. SCU Leavey School of BusinessAgenda Executive Summary Company Overview Competitive Positioning Investment Summary Financial Analysis Valuation Investment Risks SCU Confidential
  • 3. SCU Leavey School of BusinessExecutive Summary Current Price: $33.04 (March 15th 2013)Recommendation : Target Price: $23.70 Align Mis-Align Management Concerns Growing list of Competitors Poor Execution Limitations of the Product Acceleration of Growth Concerns Over valued based upon Intrinsic ValuationExecutive Company Competitive Investment Financial Investment ValuationSummary Overview Positioning Summary Analysis Risks SCU Confidential
  • 4. SCU Leavey School of Business Company Overview : ALIGN TECHNOLOGIES Business : Global Manufacturer & Supplier of Technology rich product for treatment of Malocclusion Sector : Healthcare Industry : Medical Equipment and Supplies Listing : ALGN (NASDAQ) Inception : March 1997 IPO : Jan 2001 Core Product : Invisalign clear aligners Ancillary Products : iTero intra-oral scanners, OrthoCAD digital services Market Cap : $2.62B | FY’2012 Revenues : $560M |Executive Company Competitive Investment Financial Investment ValuationSummary Overview Positioning Summary Analysis Risks SCU Confidential
  • 5. SCU Leavey School of Business Market Share and Revenue MixExisting Clear Aligner Market Share: Regional Revenue Mix Align vs. Competition 22% 85% 76% NA net revenue Europe net revenue Other International net revenueExecutive Company Competitive Investment Financial Investment ValuationSummary Overview positioning Summary Analysis Risks SCU Confidential
  • 6. SCU Leavey School of Business Competitive Positioning Invisalign Full 1999 Invisalign SmartTrack Express / Lite 2013 2005 / 08 Invisalign Vivera TM G4 Retainers 2011 2007 Invisalign Invisalign G3 2010 Teen 2009 2008 Invisalign Invisalign 1.5 Assist Can ALGN Endure or Defend its Market share?Executive Company Competitive Investment Financial Investment ValuationSummary Overview positioning Summary Analysis Risks SCU Confidential
  • 7. SCU Leavey School of Business Investment Summary - Sell M A P S Management ASPs Poor Slowed Shuffle Dropping Implementation Growth Executive Company Competitive Investment Financial Investment Valuation Summary Overview positioning Summary Analysis Risks7 SCU Confidential
  • 8. SCU Leavey School of Business Management Departures Len Hedge, Kenneth Dana Dan Ellis, Sr. VP Arola, CFO Cambra, VP of Sales Business Stepped VP of R&D, NA, Fired Operations, down Fired RetiredExecutive Company Competitive Investment Financial Investment ValuationSummary Overview positioning Summary Analysis Risks SCU Confidential
  • 9. SCU Leavey School of Business ASPs Dropping 2011 ASP 2012 ASP YoY Invisalign Full $1,465 $1,441 -2% Invisalign $964 $877 -9% Express/Lite Invisalign Teen $1,434 $1,390 -3% Invisalign Assist $1,311 $1,332 2%Executive Company Competitive Investment Financial Investment ValuationSummary Overview positioning Summary Analysis Risks SCU Confidential
  • 10. SCU Leavey School of Business Scanner Business Disappointing  Wrote a significant goodwill Q4 Q4 Annual impairment charge due to a Growth 2011 2012 termination of a distribution agreement (affects NA and Europe) Revenue $10M $10M 0%  Questionable acquisition moveExecutive Company Competitive Investment Financial Investment ValuationSummary Overview positioning Summary Analysis Risks SCU Confidential
  • 11. SCU Leavey School of Business EarningsMargins have felt the impact of increasing operations cost, lower ASPand ineffective marketing adoption EBITDA Margin Trend 600.0 560 40% 480 35% 500.0 33% 388 30% 400.0 27% 314 25% Millions 23% 300.0 21% 20% 15% 200.0 130 130 129 10% 100.0 66 5% 0.0 0% 2009 2010 2011 2012 Revenue EBITDA EBITDA margin 2009 2010 2011 2012 EPS -0.45 0.95 0.83 0.80 YoY Growth -311% -13% -4%Executive Company Competitive Investment Financial Investment ValuationSummary Overview positioning Summary Analysis Risks SCU Confidential
  • 12. SCU Leavey School of Business Product Channel and Mix North America International 35% 35% 30% 30% 25% 25% 20% 20% 15% 15% 10% 10% 5% 5% 0% 0% -5% 2009 2010 2011 2012 2009 2010 2011 2012 vs. Prior vs. Prior vs. Prior vs. Prior vs. Prior vs. Prior vs. Prior vs. Prior Case Volume Case Revenue Case Volume Case Revenue 22% Revenue Growth - YoY share of 2009 2010 2011 2012 Adult Unit Share of 4% Invisalign Full -8% 13% 14% 12% Applicable cases share of Invisalign Teen 318% 249% 42% 23% Market Teen Invisalign Assist 817% 167% 86% 5% cases Product mix focus and international expansion growth is questionableExecutive Company Competitive Investment Financial Investment ValuationSummary Overview positioning Summary Analysis Risks SCU Confidential
  • 13. SCU Leavey School of Business Financial Metrics Patterson Apr 12- 5 Yr Average ALGN Cos. Inc XRAY-US HSIC-US 1 Price/Earnings 23.96 17.28 20.09 17.33 Price/Sales 3.51 1.14 2.38 0.71  OVERpriced Price/Book Value 3.82 2.71 3.1 2.34 Enterprise Value/EBITDA 15.44 10.07 13.13 9.35 UNDERperformed EPS (diluted) 0.64 1.79 1.78 3.23 1 ALGN PE based on simple average as of Feb 12 ALGN S&P 500 P/E last 4Q 45.5 16.4 ALGN possesses an encouraging P/Sales last 4Q 4.7 1.38 and DISRUPTIVE innovative P/Book 4.5 6.7 product BUT reflects a POOR ROE 10.9 14.3 strategy plan execution ROIC 10.7 12.2Executive Company Competitive Investment Financial Investment ValuationSummary Overview positioning Summary Analysis Risks SCU Confidential
  • 14. SCU Leavey School of Business ALGN Price Performance vs. S&P 500Executive Company Competitive Investment Financial Investment ValuationSummary Overview positioning Summary Analysis Risks SCU Confidential
  • 15. SCU Leavey School of Business Valuation Compared to current Valuation Share Price market price Intrinsic Valuation (DCF) $23 -30% Comparables Valuation $25 -23% Average Valuation $24 -28% Target Price: $24Executive Company Competitive Investment Financial Investment ValuationSummary Overview positioning Summary Analysis Risks SCU Confidential
  • 16. SCU Leavey School of Business Valuation Assumptions Risk Free Rate: closer to 30-year US govt. Treasury yield of 3% Equity Risk Premium: 5.5% as per Duff & Phelps Tax Rate: 27% (lower than statutory 35% due to efficient tax structure of the company) Terminal Growth Rate: 4%; as a result of ALGN’s presence in international regions where growth is typically higher WACC: 14.5%; Discount rate (WACC) considers only cost of equity (using CAPM) since company debt is almost negligible and equity beta of 2.09 Terminal Value calculated using Gordon Growth Model Executive Company Competitive Investment Financial Investment Valuation Summary Overview positioning Summary Analysis Risks SCU Confidential
  • 17. SCU Leavey School of Business Intrinsic Valuation(USD Mil) 2009 2010 2011 2012 2013 2014 2015 2016 2017Revenue $313.5 $387.9 $480.1 $560.0 $650.5 $753.3 $869.0 $1,010.6 $1,173.8 % YoY 24% 24% 17% 16% 16% 15% 16% 16%EBITDA 66.1 129.5 129.6 129.3 176.2 211.6 252.8 304.1 364.9 % Margin 21% 33% 27% 23% 27% 28% 29% 30% 31%Operating Income 38.0 99.3 92.9 89.0 133.2 161.8 195.4 237.3 287.4Add: AmortizationPF Operating Income 133.2 161.8 195.4 237.3 287.4Less: Cash Taxes (36.0) (43.7) (52.7) (64.1) (77.6) Unlevered Net Income 97.3 118.1 142.6 173.2 209.8Add: Depreciation 13.0 14.2 17.5 17.8 17.0 19.6 22.6 26.3 30.6Add: SBC 15.1 16.1 19.2 22.4 26.0 30.1 34.8 40.4 47.0Less: Capital Expenditures 7.0 18.0 30.0 41.0 (39.0) (45.2) (52.1) (60.6) (70.4)Less: Change in Net Working Capital (2.7) (3.1) (3.5) (4.2) (4.9) Unlevered Free Cash Flow 98.5 119.6 144.4 175.1 212.0 % Growth 21% 21% 21% 21% Executive Company Competitive Investment Financial Investment Valuation Summary Overview positioning Summary Analysis Risks SCU Confidential
  • 18. SCU Leavey School of Business Comparables Valuation Dental Peer Group Valuation Comparative Valuation EV/EBITDA Company Ticker CY12E CY13E CY14E Dentsply International Inc XRAY 11.9 10.8 9.6 Nobel Biocare Holding AG NOBN-CH 7.7 8.7 7.6 Sirona Dental Systems Inc. SIRO 11.3 9.7 8 Straumann Holding AG STMN-CH 12.5 10.6 8.8 Patterson Cos. Inc. PDCO 10.2 9.4 8.8 Group Average 10.7 9.8 8.6 Implied Valuation ($M except per share) Relevant Align Metric (EBITDA or Sales) 129.3 176.2 211.6 Multiple 10.7 9.8 8.6 Align Tech EV/Share $17.0 $21.3 $22.3 Align Tech Cash/Share $4.11 $4.11 $4.11 Align Tech Equity Value/Share $21.1 $25.4 $26.4Executive Company Competitive Investment Financial Investment ValuationSummary Overview positioning Summary Analysis Risks SCU Confidential
  • 19. SCU Leavey School of Business Sensitivity Analysis Terminal Value WACC $23.17 17.0% 16.0% 15.0% 14.5% 14.0% 13.0% 12.0% 2% $18 $19 $20 $21 $22 $23 $26 TVG 3% $18 $20 $21 $22 $23 $25 $27 4% $19 $21 $22 $23 $24 $27 $30 5% $20 $22 $24 $25 $26 $29 $33 Equity Value Per Share Long term EBITDA Margin 24% 27% 31% 33% 35% 37% 12% $16 $18 $21 $22 $23 $25 14% $17 $19 $22 $23 $24 $26 4 year 16% $18 $20 $23 $25 $26 $28 Revenue 18% $19 $21 $25 $26 $28 $30 CAGR 20% $20 $22 $26 $28 $29 $32 13-17 22% $21 $24 $28 $30 $31 $34 24% $22 $25 $30 $32 $33 $36 26% $23 $27 $31 $34 $35 $38 28% $25 $28 $33 $36 $38 $41 Equity Value Per ShareExecutive Company Competitive Investment Financial Investment ValuationSummary Overview positioning Summary Analysis Risks SCU Confidential
  • 20. SCU Leavey School of Business Product Revenue Mix 2009 2010 2011 2012 2013 2014 2015 2016 2017Product Revenue Mix Invisalign Full 75% 68% 63% 60% 58% 55% 52% 49% 47% Invisalign Express/Lite 9% 9% 9% 9% 10% 11% 12% 13% 15% Invisalign Teen 8% 14% 11% 12% 13% 14% 15% 16% 17% Invisalign Assist 3% 4% 6% 5% 5% 4% 4% 4% 4% Invisalign Total Case Revenue 95% 95% 89% 87% 85% 84% 83% 83% 83% Invisalign Non Case Revenue 5% 5% 5% 5% 6% 6% 6% 6% 6% Scanners and CAD/CAM Revenue 0% 0% 3% 8% 9% 10% 11% 11% 11% Total revenue 100% 100% 100% 100% 100% 100% 100% 100% 100% Executive Company Competitive Investment Financial Investment Valuation Summary Overview positioning Summary Analysis Risks SCU Confidential
  • 21. SCU Leavey School of Business Investment Risks Upside DownsideExecutive Company Competitive Investment Financial Investment ValuationSummary Overview positioning Summary Analysis Risks SCU Confidential
  • 22. SCU Leavey School of Business Investment Risks – upside  Increased performance of Core Aligner product  Great performance of Cadent holding  New momentum by new management  Stable customer base  Effective marketing strategyExecutive Company Competitive Investment Financial Investment ValuationSummary Overview positioning Summary Analysis Risks SCU Confidential
  • 23. SCU Leavey School of Business Investment Risks – downside • Consumer confidence • Danaher level drop • Great Lakes • Unemployment Rate • Dentsply • 3M • And more Macro Econ Competition Environment Environment Align Litigation Management issues & Product • Patent expiration • No New products • International market: pipelined in near to weak intellectual long-term property protectionExecutive Company Competitive Investment Financial Investment ValuationSummary Overview positioning Summary Analysis Risks SCU Confidential
  • 24. SCU Leavey School of Business Investment Risks – Competition EnvironmentExecutive Company Competitive Investment Financial Investment ValuationSummary Overview positioning Summary Analysis Risks SCU Confidential
  • 25. SCU Leavey School of Business Investment Risks – Align Management & Product Risk Unclear Important Unsuccessful Product Management Marketing Innovation Changes Strategy PlanExecutive Company Competitive Investment Financial Investment ValuationSummary Overview positioning Summary Analysis Risks SCU Confidential
  • 26. SCU Leavey School of Business Investment Risks – downside • Consumer confidence • Danaher level drop • Great Lakes • Unemployment Rate • Dentsply • 3M • And more Macro Econ Competition Environment Environment Align Litigation Management issues & Product • Patent expiration • No New products • International market: pipelined in near to weak intellectual long-term property protectionExecutive Company Competitive Investment Financial Investment ValuationSummary Overview positioning Summary Analysis Risks SCU Confidential
  • 27. SCU Leavey School of Business GOOD GOOD COMPANIES INVESTMENT v/s Growth Stock Value StockExecutive Company Competitive Investment Financial Investment ValuationSummary Overview positioning Summary Analysis Risks SCU Confidential
  • 28. SCU Leavey School of BusinessSummaryExecutive Company Competitive Investment Financial Investment ValuationSummary Overview positioning Summary Analysis Risks SCU Confidential
  • 29. SCU Leavey School of Business SCU Confidential
  • 30. SCU Leavey School of Business APPENDIX SCU Confidential
  • 31. SCU Leavey School of Business Consumer Confidence Level 160 80 140 70 120 60 Align Revenue in Millions 100 50 Consumer Index 80 40 60 30 Align Revenue(Millions) 40 20 Consumer Index 20 10 0 0 Align Revenue and Consumer Index CorrelationExecutive Company Industry Competitive Investment Financial Investment ValuationSummary Overview Overview positioning Summary Analysis Risks SCU Confidential
  • 32. SCU Leavey School of Business Lingual Traditional Invisalign Braces Braces Aligners Completely invisible from Outside Y Appropriate for Most Patients Y YAlways on and always working toward your Y Y final result Can eat and drink with them on Y Y Cant be misplaced or lost Y Y Y 100% Customized Y YPriced Slightly higher than traditional braces Y SCU Confidential
  • 33. SCU Leavey School of Business Competitive Positioning- Gold Standard - Elective & Expensive nature of treatment- Patent Protection (490 till date) - Several limitations with Treatment- Product Innovation - YOY Rev Growth decline in Aligner segment- Production Automation - X-factor is the treating Dentist- Early Mover Advantage - No new products in pipeline as of date- Most Treated Patients - Management Changes- Strong Marketing Force - Gross margins under pressure STRENGTHS WEAKNESSES OPPORTUNITIES THREATS- Only 15% of worldwide addressable - Near Term Macroeconomic Uncertainties orthodontic market has been captured - Surge of Competitors- Under penetrated Teen Segment - Declining Average Selling Prices- Potential for growth in emerging markets - Termination of distribution agreements - Continuing Litigation Expenses SCU Confidential
  • 34. SCU Leavey School of BusinessALGN Price Performance vs. NASDAQ 100 SCU Confidential
  • 35. SCU Leavey School of Business Income Statement 2010 2011 2012 % Inc/(Dec) % Inc/(Dec) % Inc/(Dec) $ in millions except per share data $ $ $ from Prior Yr from Prior Yr from Prior YrRevenue/Sales 387 24% 480 24% 560 17%Cost of revenue 84 6% 118 40% 144 22%Gross profit 303 30% 361 19% 416 15%Operating expensesResearch and development 26 18% 37 42% 43 16%Sales, General and administrative 192 -21% 231 20% 248 7%Restructuring, merger and acquisition -100%Other operating expenses (17) 2 -112% 40 NMTotal operating expenses 201 -25% 271 35% 331 22%Operating income 103 -403% 90 -13% 86 -4%Interest ExpenseOther income (expense) (1) N/A - N/A (1) N/AIncome before taxes 102 -400% 90 -12% 84 -7%Provision for income taxes 28 NM 23 -18% 26 13%Net income from continuing operations 74 -339% 67 -9% 59 -12%Net income 74 -339% 67 -9% 59 -12%Net income available to common shareholders 74 -339% 67 -9% 59 -12%Earnings per shareBasic 1 -318% 1 -12% 1 -15%Diluted 1 -311% 1 -13% 1 -14%Weighted average shares outstandingBasic 76 10% 78 3% 81 4%Diluted 78 13% 80 3% 83 4% SCU Confidential
  • 36. SCU Leavey School of Business Balance Sheet 2010 2011 2012 % Inc/(Dec) % Inc/(Dec) % Inc/(Dec) $ in millions except per share data $ $ $ from Prior Yr from Prior Yr from Prior Yr Assets Current assets Cash Cash and cash equivalents 295 178% 241 82% 306 127% Short-term investments 9 45% 7 78% 28 400% Total cash 303 163% 248 82% 335 135% Receivables 65 118% 92 142% 99 108% Inventories 3 150% 9 300% 15 167% Prepaid expenses 17 94% 32 188% 35 109% Other current assets 4 2 Total current assets 389 149% 385 99% 486 126% Non-current assets Gross property, plant and equipment 98 103% 129 132% 165 128% Accumulated Depreciation -68 97% -75 110% -86 115% Net property, plant and equipment 31 124% 54 174% 79 146% Equity and other investments 9 21 Goodwill 0 135 99 Intangible assets 2 40% 50 2500% 46 92% Deferred income taxes 42 68% 22 52% 22 100% Other long-term assets 3 150% 3 100% 3 100% Total non-current assets 88 94% 264 300% 271 103% Total assets 477 134% 649 136% 756 116% Liabilities and stockholders equity Liabilities Current liabilities Accounts payable 8 133% 22 275% 22 100% Taxes payable 5 7 140% 6 86% Accrued liabilities 46 107% 62 135% 66 106% Deferred revenues 34 106% 52 153% 62 119% Total current liabilities 93 115% 148 159% 156 105% Non-current liabilities Other long-term liabilities 6 600% 10 167% 19 190% Total non-current liabilities 6 600% 10 167% 19 190% Total liabilities 99 121% 158 160% 175 111% Total stockholders equity 378 138% 491 130% 581 118% Total liabilities and stockholders equity 477 134% 649 136% 756 116% SCU Confidential
  • 37. SCU Leavey School of Business Cash Flow Period Ending in thousands 12/30/12 12/30/11 12/30/10 Net Income 58,691 66,716 74,253 Operating Activities, Cash Flows Provided By or Depreciation 17,811 17,477 15,013 Adjustments To Net Income 60,659 13,734 29,670 Changes In Accounts Receivables (9,138) (21,693) (12,184) Changes In Liabilities 15,326 60,974 24,497 Changes In Inventories (5,718) (4,058) (508) Changes In Other Operating Activities (3,853) (2,681) (1,212) Total Cash Flow From Operating Activities 133,778 130,469 129,529 Investing Activities, Cash Flows Provided By or Capital Expenditures (38,333) (30,404) (18,031) Investments (42,313) 10,317 2,256 Other Cash flows from Investing Activities 2,346 (191,519) (145) Total Cash Flows From Investing Activities (78,300) (211,606) (15,920) Financing Activities, Cash Flows Provided By or Dividends Paid - - - Sale Purchase of Stock (4,876) 17,747 11,822 Net Borrowings - - - Other Cash Flows from Financing Activities (2,106) (1,897) (1,080) Total Cash Flows From Financing Activities 10,205 27,241 14,707 Effect Of Exchange Rate Changes 28 (93) (139) Change In Cash and Cash Equivalents 65,711 (53,989) 128,177 SCU Confidential
  • 38. SCU Leavey School of Business Financial Trend Revenue Case Shipments $600 400 $500 350 300 $400 in thousands 250in millios $300 200 150 $200 100 $100 50 $- - 2007 2008 2009 2010 2011 2012 2007 2008 2009 2010 2011 2012 Gross Margin Operating Margin 79% 30% 78% 25% 77% 20% 76% 15% 75% 10% 74% 5% 73% 0% -5% 2007 2008 2009 2010 2011 2012 72% 71% -10% 2007 2008 2009 2010 2011 2012 -15% SCU Confidential
  • 39. SCU Leavey School of Business Goodwill Impairment Preliminary Analysis Disclosed in Q312 Form 10Q• In Q312 we determined that there were sufficient indicators of a potentialimpairment to the goodwill attributed to the Scanner and CAD/CAM Servicesreporting unit (SCCS), therefore conducted step 1 of the goodwill impairmentanalysis and determined the goodwill was impaired.• These indicators included the termination of an exclusive distributionarrangement with Straumann for iTero intra-oral scanners in Europe, as well asthe termination of their non-exclusive distribution arrangement for iTero intra-oral scanners in North America, together with market conditions and businesstrends within SCCS.• Based on our preliminary analysis we recorded an estimate of $24.7 million forthe SCCS goodwill impairment charge.• Expect to finalize step 2 of the goodwill impairment analysis and record anychange from our estimate, if necessary, in Q412. SCU Confidential
  • 40. SCU Leavey School of Business ALIGN Patents SCU Confidential