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Tech stocks - Friday, August 8, 2008

Align Technology's Stock Will Not Leave You Smiling

So the financial rally of a week ago is now a fading memory as everyone in the industry takes a hit because of AIG's (AIG:NYSE) "surprising" announcement. At least we have a little more faith in the market considering Merrill Lynch's (MER:NYSE) announcements of selling shares in the company for less than market value and the fire sale of CDOs at $.22 on the dollar, which resulted in the company stock skyrocketing almost 25%. At the very least, the market is showing some logic once again which leads us to believe that companies who look to provide the best possible return for their shareholders will be rewarded with higher valuations.

Taking a different tract today, we at tech:stocker decided to listen to one of our readers and take a look at a stock they recently purchased. The reader highly praised their latest addition to their portfolio, Align Technology (ALGN:NASDAQ) , a manufacturer of invisible-orthodontics. After doing some initial research, we at tech:stocker were thankful the reader was not managing our investment portfolio.

Founded back in 1997, Align Technology introduced the first Invisalign products in 1999 that handled minor misalignment issues. According to a few dentists we polled, the technology has never really advanced much further in the last nine years. This means Align Technology is fairly reliant on marketing and educational programs to improve its sales. That's never good, especially when most insurance companies consider the products "elective procedures".

And worrying whether or not U.S. citizens will continue to spend money on elective procedures with their discretionary income is only one of the company's many worries. While the company's gross margins have increased slightly over the last three quarters, operating expenses have jumped dramatically. Whether the company is entertaining dentists (an expensive proposition as we know they can drink with the best) or dumping a little too much money into employee salaries and bonuses. After examining the company Web site and press releases, we can only hope they are not spending much money on either.

While we weren't satisfied by Align's second quarter results, the easy to impress CEO Thomas M. Prescott was pleased with the company's "solid performance". Even though he was pleased, Mr. Prescott also stated there would be 38 layoffs in the workforce of 1,400 worldwide and cuts in discretionary spending totaling a reduction of expenses between $5 and $6 million. Considering that expenses have increased by $13.9 million over the last three quarters, we would be more enthusiastic if Mr. Prescott had undertaken this mediocre measure last quarter.

To their credit, Align Technology announced back in April that they would be repurchasing $50 million of their stock. Normally we applaud such a move but in Align Technology's case, we would prefer that the company improve its employee equity plan along with repurchasing the stock so that the company's shareholders receive maximum value from the company's $50 million investment.

Align Technology's latest product line is the Invisalign Teen. Hopefully the company isn't pinning its future on this latest addition to the product line. While we never liked wearing braces as a teen, unfortunately the Invisalign Teen doesn't eliminate the need for braces. Asking cost conscious parents to shell out more dollars for a product that cannot guarantee the eliminations of expensive braces is a dicey proposition.

Ultimately, until Align Technology introduces the "Invisalign U.K. For The Active Pub Drinker and Footballer" (we know this is a cheap shot but we do have ancestors who arrived on the Mayflower), we think their isn't a straight path to better profits and the company's share price will continue to rot like an unbrushed tooth until they get to the root of their excessive spending. Hopefully our reader will find a better place for their precious investment dollars before their smile is wiped off their face.