Align Technology (ALGN 3.04%) has spent more than 20 years selling its clear dental aligners, a substitute for traditional braces. Envista Holdings (NVST 2.95%) emerged last September following an initial public offering, being spun off from parent company Danaher (DHR 0.65%). Cobbled together from 25 acquisitions over the past 15 years, Envista markets a portfolio of more than 30 global brands comprising dental implants, surgical tools, biomaterials, imaging tools, and orthodontic products, including newly launched clear aligners.
Align's business model is quite simple. Alongside its flagship Invisalign teeth aligners, it sells imaging equipment and services to dentists and orthodontists globally. Envista's business is more complex due to the range of products it sells. However, the company claims its products can be found in 90% of dentists' offices, making it a formidable dental supplier. Which of these two dental giants' stocks are a better buy today?
Why the disparity in valuation?
Align's $22.1 billion valuation dwarfs Envista's $5.1 billion market cap. Why? For one, Envista is a relatively new stock, so its management must forge relationships with institutional investors. This is a period to establish awareness and credibility of the team and help investors understand the dynamics of the business.
Second, Envista offers a suite of tools and products for dental offices that includes lower-margin supplies. Align focuses only on higher-margin aligners and the scanners needed to create them. Thus, Envista generated net income of $161.5 million on sales of $2.03 billion through the first nine months of 2019, while Align's net income came in at $321.5 million on sales of $1.76 billion. Using percentages, Envista's earnings were 8% of sales, compared with 18.3% for Align. Envista's management touts a shift in product mix to higher-margin specialty products, but investors will need to see that play out.
Third, Envista faces more operational challenges based on its acquisition history. At the recent JP Morgan Healthcare Conference, Envista's management noted that it was reducing its operational complexity, footprint, and cost structure by reducing the number of brands, consolidating physical sites by more than 35%, and drastically cutting back on the number of suppliers. This should provide $60 million annually in cost savings.
Fourth, Align simply continues to beat analyst earnings estimates every quarter. The company expects to generate at least $640 million in fourth-quarter sales. Add that to the $1.76 billion in revenues through the first nine months of 2019. That's $2.4 billion worth of clear aligners and the supporting imaging equipment sold last year. That's tremendous compared to Envista's basket-of-products approach for a variety of dental and orthodontic needs.
How will the stocks perform?
Since Envista only began trading at the end of September, its stock history is minimal. The 10 analysts who cover it peg price targets between $30 and $37 per share with a median of $33.50. The current price of $32.58 does not leave a lot of room for growth (assuming the analysts are right!)
Meanwhile, Align sports price targets from analysts ranging from $220 to $363 per share, with a median of $305. Hitting the median implies a return of 14.7% using the current price of $266. However, analysts have differing views on the future for Align. Those with price targets at the bottom of the range believe potential headwinds will challenge the company. The negative case focuses on the end of the partnership with SmileDirectClub (SDC 5.71%) which announced its intent to compete with Align by selling its clear aligners directly to dentists and orthodontists.
What does the future hold?
Align will continue to dominate with Invisalign, arguably the most recognized product in the clear-aligners field. Increased demand for Invisalign, particularly overseas, is expected to drive much of the revenue growth. Some investors may be wary in the near term until there is more clarity on SmileDirectClub's new effort to compete with Align.
Part of the messaging for Envista's spinoff from Danaher was to allow the dental business to grow through additional acquisitions. Management boasts more strong cash flows to support merger and acquisition activity. The company's website and recent presentations focus on priority areas for possible acquisitions. However, investors may want to seek more clarity on the strategy before buying the stock.
Which stock wins?
Align shows no signs of slowing, and demand for Invisalign should continue through 2020. However, if an economic downturn or recession hits, individuals will likely delay straightening their teeth. Many individuals view teeth aligning as a want rather than a need, and some dental insurance plans do not cover the entire amount. A market downturn would negatively impact Align's sales and its stock.
Envista remains in a show-me mode for investors learning about the company and its operations. Over the course of the year, it's likely to grow as well, potentially delivering on one or two small acquisitions. Envista's broad product mix and existing widespread penetration into most dental offices makes it the better positioned of the two should the economy turn south.
I predict Envista's clear aligners will struggle to gain significant market share over Invisalign and other existing competitors unless Envista can incentivize dentists and orthodontists to switch. Pricing will likely be in line with competitors. That means that Envista has to take less revenue per sale in order to give extra financial incentive to the dentists and orthodontists. Therefore, investors seeking exposure to the dental industry are better off, for now, buying shares of Align.