Shares of SmileDirectClub (SDC) moved higher in morning trading after JPMorgan called the company "one of the best buying opportunities it covers." The analyst note comes just weeks after the firm initiated coverage of the stock with a Buy rating and days after a short-seller slammed SmileDirectClub for practices it said puts patients at risk.
'ONE OF THE BEST BUYING OPPORTUNITIES': JPMorgan analyst Robbie Marcus told investors in a research note that there is a lot of misinformation and confusion around SmileDirectClub's ongoing litigation in states to prevent the introduction of rules that are specifically aimed to prohibit its direct-to-consumer orthodontic practice. However, Marcus said the company is "very well positioned" in the battle against orthodontists and dentists who are being disrupted by the direct-to-consumer model. He views the company as "one of the best buying opportunities" in his coverage universe.
Marcus broke down the litigation into three buckets: Actions brought about by state dental boards, specifically Alabama and Georgia; legal proceedings in California; and other states where the company has taken steps to "thwart" harmful legislation. Regarding the Alabama and Georgia litigation, the analyst said that so far, SmileDirectClub has prevailed in the states' motions to dismiss the case against it, and the DOJ and FTC have sided with the company and argue that the boards did not follow the necessary legal protocols to implement its rules. On the second issue, Marcus also argued that SmileDirectClub's business model fully complies with California's recently passed AB 1519, but sees legislation introduced in January that either modifies or overturns the bill. On the third bucket, Marcus said it is important to note positive telehealth legislation has been enacted to support SmileDirectClub in states like Florida and Massachusetts.
The analyst, who has an Overweight rating and $31 price target on SmileDirectClub shares, said he expects "strong" results from the company when it reports on November 12.
WHAT'S NOTABLE: Earlier this month, JPMorgan's Marcus initiated coverage of SmileDirectClub, saying that the company's clear aligners and direct-to-consumer business model "solve many of the issues" in the orthodontics market that have remained unaddressed for several decades, namely high costs and a significant time commitment. He said he saw a "clear path" to sustained top-line growth at an almost 50% annual growth rate through 2023. At the time, Marcus said the company's business model solves many of the problems that make orthodontics timely and expensive. "The company sets itself apart from both traditional orthodontics players and direct-to-consumer competitors with (1) the convenience and ease of access it provides over the traditional orthodontics business model; (2) affordable product offerings; (3) a seamless in-house financing option; and (4) complete vertical integration, which drives a best-in-class patient experience," Marcus said.
SHORT SELLER: Several days before the initiation, short seller Hindenburg Research said it estimates that the stock has about 85% downside in a damning note outlining practices that are illegal and endanger patients. "Financially, the company is another profitless, cash incinerating 'unicorn' that we believe has significant added financial headwinds to face as a result of regulatory, legal and customer satisfaction liabilities," Hindenburg Founder Nathan Anderson wrote in the report. SmileDirect responded with a statement that hit out at "organized dentistry," saying "There is no factual basis nor scientific or medical justification in these allegations to substantiate the false claims made about our model and the state-licensed doctors in our affiliated network."
PRICE ACTION: In morning trading, shares of SmileDirectClub are up 2.2% to $11.63.
SmileDirectClub
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