Stocks’ Details

SmileDirectClub, Inc. 

A look at 2QFY20 Key Financial Highlight: SmileDirectClub, Inc. (NASDAQ: SDC) belongs to the oral care industry. The company’s clear-aligner treatment addresses the huge worldwide orthodontics market. During the June 2020 quarter, the company reported total revenues of $107 million, down from $195.8 million reported in the year-ago period. Net loss for 2QFY20 stood at $94.6 million, as compared to a net loss of $32.4 million reported in the year-ago period. Adjusted EBITDA loss for the quarter was $20.3 million, as compared to $6.2 million reported in 2QFY19. During the quarter, unique aligner shipments came in at 57,136. Average aligner gross sales price (“ASP”) stood at $1,817, up from $1,761 reported in the year-ago period. The company reported sales and marketing expense of $34.5 million, as compared to $113.4 million reported in the year-ago period. The company exited the quarter with a cash balance of $388.9 million, with long term debt amounting to $389.5 million.

Key Financial Highlight (Source: Company Reports)

SDC Partners with Smile Brands: On August 11, 2020, the company announced that it has partnered with Smile Brands Inc. and its 450 affiliated dental practices across 18 states to permit consumers to commence their SmileDirectClub journey in the dentist chair.

Outlook: The company remains on track to stay afloat in the complex operating environment and continues to see robust performance across the business. The company also invests in brand building and marketing efficiency, which positions SDC to advance further toward its long-term revenue growth and margin targets.  Further, the company enjoys a robust international presence, which is likely to benefit financial performance, going forward. 

Key Risks: Higher operating expenses in the second quarter, might weigh on the company’s margins in the near term. Further, risks regarding COVID-19 led crisis and stiff competition in the market adds to the woes.

Stock Recommendation: The stock of SDC closed at $7.84 with a market capitalization of ~$3.01 billion. The stock made a 52-week low and high of $3.64 and $21.1, respectively, and is currently trading at the lower band of its 52-week trading range. On technical analysis front, the stock of the company has a support level of ~$7.03 and a resistance level at ~$9.70. The stock has generated returns of ~12.83% and ~15.2% in the last one month and three months, respectively. The company remains focused on product development and is optimistic about a series of product launches, which are expected to aid the company’s business prospects in the days ahead. The company’s debt to equity ratio stood at 0.70x in Mar’20, as compared to the industry median of 0.34x. On the valuation front, the stock is trading at a P/BV multiple of 11.3x as compared to the industry median (Healthcare) of 2.9x on TTM (Trailing Twelve Months) basis and thus, seems overvalued.  Considering the aforesaid facts, current trading levels and business prospects, we have a wait and watch stance on the stock at the closing price of $7.84, down 15.88% as on 13 August 2020. 

Vertex Pharmaceuticals 

Revenues and Earnings up Year Over Year: Vertex Pharmaceuticals (NASDAQ: VRTX) is mainly focused on the innovation, development, and commercialization of small molecule drugs targeting severe infections. The company’s main area of focus is cystic fibrosis (CF).

Q2FY20 Key Financial Highlight: During the June 2020 quarter, the company reported EPS of $2.61, which skyrocketed 107% from the prior corresponding period. Higher bottom line growth was on the back of robust cystic fibrosis (“CF”) product revenues. During the quarter, the company reported revenues of $1.52 billion. Notably, total revenues, including only CF product sales, increased 62% on pcp. Likewise, revenues were positively impacted by higher international revenues, which came from the reimbursement authorizations received for Orkambi and Symkevi in some international markets in FY19. Adjusted research and development (R&D) expenses stood at $321 million, up 18.5% year over year. Whereas, selling, general and administrative (SG&A) expenses on an adjusted basis soared 18.7% year over year, during the quarter. The company exited the quarter with cash balance of $5.45 billion million.

Key Financial Highlights (Source: Company Reports)

FY20 Outlook: The company raised it revenue guidance for FY20, primarily based on Trikafta’s continued strong performance during the reported quarter. The company now expects total revenues from CF products to be between $5.7-$5.9 billion, up from the previous outlook of $5.3-$5.6 billion.

Key Developments: The company is presently registering patients in a phase II proof-of-concept survey on its investigational candidate, VX-147, for the therapy of APOL1-mediated focal segmental glomerulosclerosis (FSGS). Notably, VRTX is in partnership with CRISPR Therapeutics is jointly developing a gene editing treatment, CTX001, for two diseases, specifically sickle cell disease and transfusion-dependent beta thalassemia. In July, the company also began a phase II study to assess its second Z-AAT corrector, VX-864. 

Risks: Limited sources of revenue generation, higher R&D costs, ability and willingness of third-party collaborators, commercialization, and operational risks, subject to the success of strategic alliances are potential headwind to the company.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock of VRTX closed at $267.15 with a market capitalization of ~$69.6 billion. The stock made a 52-week low and high of $165.23 and $306.08, respectively, and is currently trading at the upper band of its 52-week trading range. On technical analysis front, the stock of the company has a support level of ~$263.27 and a resistance level at ~$289.11.The company’s debt to equity ratio stood at 0.08x in Mar’20, as compared to the industry median of 0.00x. Considering the robust results for 2QFY20, resilient business, modest industry outlook and growth prospects, we have valued the stock using EV/Sales multiples based illustrative relative valuation method and arrived at a target price with an upside of lower double-digit (in % terms). Hence, we recommend a “Speculative Buy” rating on the stock at the closing price of $267.15, down 1.37% on 13 August 2020.

Align Technology, Inc. 

ALGN Inks Deal With NFL: Align Technology, Inc. (NASDAQ: ALGN) is engaged in manufacturing and marketing of clear aligner therapy, intra-oral scanners, and CAD/CAM digital services, which are utilized in dentistry, dental records storage and orthodontics. On August 3, 2020, the company inked a deal with the National Football League (NFL) to make the Invisalign brand the Official Clear Aligner Sponsor of the NFL. As per the agreement, the Invisalign brand will get along with doctors, consumers, and patients via an extended network of NFL funded channels and will aid a range of community programs supported by NFL Clubs. In another update, the company entered into a partnership agreement with the New Orleans Saints, making the Invisalign brand the “Official Smile” partner of the Saints.

2QFY20 Key Highlights: During the quarter, the company reported non- GAAP net loss per diluted share of 35 cents per share, as compared to the year-ago earnings of $1.49 per share, owing to lower-than-expected revenues of Invisalign Clear Aligners and iTero scanners during 2QFY20 caused by COVID-19 pandemic. Revenues during the quarter came in at $352.3 million, down 41.3% year over year. In 2QFY20, gross margin stood at 63.7%, which contracted 829 basis points (bps) year over year. The company saw a decrease of a 4.1% year-over-year in selling, general and administrative expenses 3.9% rise in research and development expenses. Operating loss in the quarter under review was $73 million, as compared with an operating profit of $125.5 million reported in the year-ago period. The company exited the quarter with cash balance of $404.4 million. Net cash provided by operating activities stood at $69.7 million at the end of the 2QFY20.

Key Highlights (Source: Company Reports)

Outlook: The company has withdrawn its outlook for 3QFY20, owing to the uncertainties regarding the duration and impact of the coronavirus pandemic on its business performance. However, the opening up of businesses in China since mid-March is expected to be a tailwind for the company.

Key Risks: The company exited the second quarter on a dismal note, with substantial drop in quarterly revenues and huge bottom-line disaster. The company also witnessed lowest sales of Invisalign clear aligners and iTero scanners due to the coronavirus led pandemic. Poor international performance in most of the geographies and foreign exchange fluctuations are other headwinds for the company.

Valuation Methodology: P/BV Multiple Based Relative Valuation (Illustrative)

P/BV Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock of ALGN closed at $312.22 with a market capitalization of ~$24.6 billion. The stock made a 52-week low and high of $127.88 and $326.36, respectively, and is currently trading at the upper band of its 52-week trading range. On technical analysis front, the stock of the company has a support level of ~$270.19 and a resistance level at ~$319. The stock has generated positive returns of ~15.53% and ~55.35% in the last one month and three months, respectively. On a positive note, APAC, Japan, Taiwan, and South Korea witnessed robust recovery efforts and performed better than the company’s expectations in 2QFY20. The company’s debt to equity ratio stood at 0.00x in Jun’20, as compared to the industry median of 0.34x. We have valued the stock using P/BV multiples based illustrative relative valuation method and arrived at a target price with a correction of high single-digit (in % terms). Considering the aforesaid facts, current trading levels, and sharp movement in the share price in the last three months, we suggest investors to wait for better entry levels and give an “Expensive” rating on the stock at the closing price of $312.22, up by 1.38% on 13 August 2020. 

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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