Align Technology (ALGN) makes Invisalign brand clear orthodontic braces which it calls “aligners.” These are more expensive than wire-and-bracket braces, but they offer many advantages, with improved aesthetics high on the list, notes Doug Gerlach, editor of Investor Advisory Service.

They can also be removed for meals and toothbrushing, require less labor when starting new cases, and allow treatment to progress with fewer office visits.

Clear aligners make tooth straightening services available in practices that did not historically offer wire-and-bracket solutions, especially outside of the U.S. Aligners have gross margins over 70% and account for approximately 80% of revenue.

The company’s other business is digital scanners and solutions. Align sells the leading brand of intraoral scanners, iTero. These are useful for planning new Invisalign cases but are also integrated into the wider dental/orthodontic practice to support a full range of aesthetic and restorative treatments.

We expect Align to continue to grow its presence adjacent to its tooth-straightening, such as implants and tooth-whitening. Its less invasive treatment option appeals both to patients and to the doctors who may have enjoyed higher margins and greater familiarity with traditional bracket-and-wire solutions.

After first achieving regulatory clearance in 1998, clear aligners grew steadily in the United States but took longer to catch a foothold in overseas markets. They have grown rapidly in many markets where tooth straightening was historically uncommon.

International revenue was over 40% of the total in 2019. The pandemic disrupted growth patterns, but it appears that international could overtake U.S. revenue as soon as this year.

What is even more exciting is the potential for further operating leverage. Earnings growth has compounded at greater than 30% annually over the past decade.

Those are some of the fastest growth rates among companies we track, and it should be no surprise that ALGN shares also trade at one of the highest valuation ranges — but we think investors brave enough to catch the falling knife will be rewarded in this case. The future is always uncertain, but it is hard to imagine Align failing to grow into its current valuation within a reasonable time horizon.

We model 18% compound EPS growth, which could generate EPS of $25.53 in five years. That figure, combined with a high P/E of 35, generates a high price of $894. For a low price, we contemplate 18% downside to $400. On that basis, the upside/downside ratio is 4.5 to 1.

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