Align Technology Inc (NASDAQ:ALGN) Presents a Compelling Case for Value Investors

For investors looking for chances in the current market, value investing continues to be a proven method centered on finding companies trading for less than their inherent value. This framework, established by Benjamin Graham and later developed by Warren Buffett, stresses buying securities with a large safety buffer, where the market price is meaningfully lower than the estimated business value. The method focuses on solid basics such as financial stability, steady earnings, and acceptable growth potential, all while requiring good valuation measures. One company now matching this description is Align Technology Inc (NASDAQ:ALGN).

Valuation Measures

A fundamental part of value investing is finding companies trading at sensible prices compared to their earnings and cash flow. Align Technology's valuation measures point to possible underappreciation when measured against both industry counterparts and wider market benchmarks.

• Price/Earnings Ratio: At 14.42, ALGN's P/E ratio is much lower than the industry average of 34.64. This means 86% of its Health Care Equipment & Supplies industry counterparts are valued more highly.
• Price/Forward Earnings Ratio: The forward P/E of 12.53 is also noteworthy, positioned well under the industry average of 36.32 and the S&P 500's average of about 34.57.
• Enterprise Value/EBITDA and Price/Free Cash Flow: Using these measures, ALGN is valued lower than over 86% and 91% of its industry rivals, in that order.

For a value investor, these numbers are very important. A low P/E ratio relative to its own history and similar companies can signal the market is underappreciating the company's earnings capacity, offering that important safety buffer Graham famously supported.

Financial Health Evaluation

Financial health is critical in value investing to confirm the company can survive economic slowdowns and steer clear of the feared "value trap." Align Technology shows clear strength here, especially concerning its balance sheet.

• Zero Debt: The company functions with no debt, giving it a Debt/Equity ratio of 0. This puts it with the most financially sound companies in its field and removes interest rate exposure.
• Solvency: An Altman-Z score of 4.24 shows a low short-term chance of financial trouble and does better than 75% of industry counterparts.
• Share Count: The company has been lowering its count of shares outstanding over the last one and five years, which is an action good for shareholders that can raise the value of each share left.

This sound financial situation offers a cushion, matching the value investing rule of protecting capital by putting money in companies with solid balance sheets.

Profitability Examination

Value investing is not just about purchasing low-cost stocks; it is about purchasing good businesses at a reduced price. Profitability measures help verify that a company has a lasting competitive edge, or "economic moat."

• Return Measures: ALGN's Return on Invested Capital (ROIC) of 10.50% and Return on Equity (ROE) of 11.18% are with the top in its industry, doing better than about 90% and 86% of peers. This shows effective use of capital.
• Margins: The company keeps good margins, with an Operating Margin of 16.14% (superior to 85% of the industry) and a Gross Margin of almost 70%. While these margins have faced some recent reduction, they stay high for the sector.

Reliable and high profitability is a sign of a good business. For a value investor, matching such quality with a good price is the main objective of the method.

Growth Outlook

While pure value stocks can sometimes miss growth, the best candidate provides acceptable growth at an acceptable price. This confirms the business is not in a lasting condition of decrease.

• Past Growth: Over the last few years, ALGN has shown solid past growth, with Revenue increasing at an average yearly rate of 10.69% and EPS increasing at 11.91%.
• Future Predictions: Analysts forecast continued growth, with EPS predicted to rise by about 10.83% each year. Revenue growth is predicted to be more limited but still good.

This growth picture supports the thought that the company is not a still value trap but a growing firm that could be temporarily unpopular with the market. The steady and positive predicted EPS growth helps support the investment idea over the long term.

Conclusion

Align Technology Inc offers a noteworthy case for investors using a value-focused method. The stock seems underappreciated based on important earnings multiples, shows outstanding financial health with no debt, and displays good profitability measures that indicate a quality business. When these traits are joined with an acceptable growth view, the stock fits well with the rules of looking for quality companies obtainable at a price under their inherent value.

For investors wanting to find other companies that meet similar standards of good valuation, acceptable profitability, health, and growth, more investigation can be performed using the Decent Value Stocks screen on ChartMill.

Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation to buy or sell any security, or an offer to solicit any transaction in securities. All investments involve risk, including the possible loss of principal. Investors should conduct their own independent research and consult with a qualified financial advisor before making any investment decisions.