Lofty Align Tech shares may rise more on U.S. tax cut, index inclusion

NEW YORK (Reuters) - Prospects for steep U.S. tax cuts are raising the ceiling for already-frothy shares of Wall Street-favorite Align Technology Inc even as patents expire for some of the technology that has helped its braces gain favor with orthodontists.

Shares of the $15.6 billion market cap company are up more than 100 percent for the year to date, and have jumped nearly 30 percent over the last three months, as the Trump administration and the Republican-controlled Congress have released proposals to cut corporate taxes and lower the highest personal income tax rate to 35 percent from 39.6 percent.

Shares of Align rose 0.2 percent to $194.60 in early trading Wednesday. All 12 analysts tracked by Reuters that cover the company have a "buy" rating on its shares, with a median target price of $200, up from a median of $159 on July 17.

Fund managers say some U.S. consumers will probably spend part of their tax savings on cosmetic procedures like Align's braces, which cost an average of $5,000 and are often not covered by insurance plans for adults.

"More of that spend is going to come in places that consumers can touch and feel and aesthetics is an obvious one," said Matt Litfin, a portfolio manager of the $4.8 billion Columbia Acorn fund. Litfin added 22,143 shares of Align Technology, the fund's largest position, in the last quarter, according to securities filings.

A Morningstar report on Monday said the strong run for the company for the year to date has left its shares overvalued. Align shares hit a record high of $196.04 on Tuesday, and trade at a trailing price to earnings ratio of 66.3, nearly double the low for the year of 37.4.

Jeff Johnson, an analyst at R.W. Baird, said the shares remain attractive despite their high valuation. He said Align has more than a 90 percent share of the market for high-end clear braces, for patients who need several rounds of the removable braces to correctly align their teeth. It also has close to a 65 percent share of the lower-end market for simpler cases.

Other companies in the braces market such as 3M Co and Danaher Corp are losing ground to Align even as some of its patents expire this month, such as those that allow it to build computer models to predict movement of a patient's teeth, Johnson said. More orthodontists use Align's products because its proprietary hard plastic, which remains under patent, is as effective as brackets and wires, he said. Align's products also allow doctors to spend less time with each patient.

Overall, 138 mutual funds, exchange-traded funds and hedge funds added a position in Align Technology last quarter, a 318 percent increase from the quarter before, according to Morningstar data. The company will be added into the Nasdaq 100 index on Oct 23, leading to more institutional buying from exchange traded funds that track the index, such as the $53.2 billion Plowshares QQQ.

Jim Calling, portfolio manager of the $53.6 million Otherwise Emerging Opportunity fund, added a position in Align Tech in the last quarter despite its strong run up for the year. "They own the adult market," he said. "Some of the products may be coming off patent this year, but they have such a lock on the business."

(Reporting by David Randall; Editing by Jennifer Ablan and David Gregorio)