SmileDirect Bulls Put Up United Front as Window to Sell Opens

(Bloomberg) -- SmileDirectClub Inc., the worst performer among last year’s billion-dollar-plus debuts, is facing a critical moment to prove Wall Street bulls haven’t lost their minds.

On March 10, the first window opens for insiders and early investors to sell shares and cut their losses. Executives and board members are putting up a united front in sitting out active selling come Tuesday, Chief Financial Officer Kyle Wailes said in a phone interview.

The lockup expiry comes amid a historic market meltdown and follows two disappointing earnings reports for SmileDirectClub, the most recent of which included delayed profitability guidance and what analysts characterized as a major shift in business strategy. The maker of teeth straighteners has lost more than two-thirds of its value since its September initial public offering but the majority of analysts still recommend buying shares.

Lockup expirations are often cited as presenting downside risk for new listings, but this one hasn’t been mentioned in most of the recent analyst reports. Rather, analysts across the rating spectrum have underscored the immediate implications of guidance provided during the last earnings report in February.

SmileDirectClub is suffering growing pains in “classic” disruptor style, Loop Capital Markets analyst Laura Champine said in an interview. Manufacturing issues in the fourth quarter led to delays in aligner shipments, which came up short of Street expectations. The Nashville, Tennessee-based company also delayed expectations for profitability by one reporting period to the fourth quarter.

Champine says “the long-term use case for the product is strong” and there’s value presented in shares at recent levels.

“There’s a price for everything and $8 is good for what you’re getting,” she said on Thursday.

Since then, the stock has continued to slide amid a broad market meltdown. The shares touched a low of $7.06 in Monday’s trading, and the average analyst price target now implies about 70% return potential over the next 12 months.

Wolfe Research, the sole sell rating among those tracked by Bloomberg, has a price target of $4.

“Our view remains that consensus embedded (and likely still does) unattainable uptake rates relative” to the total addressable market, Wolfe analyst Steve Beuchaw wrote in a report published in late February.

Based on Beuchaw’s estimate for a loss of $290 million in free cash flow this year, “the company may need to further tap the credit facility or otherwise monetize the SmilePay receivables in 2020,” he said, referring to what is owed to the company for financing options provided to customers.

Bank of America has also said there is a “greater likelihood” of an equity raise to fund operations. That could raise eyebrows, because while SmileDirectClub’s basic weighted average shares outstanding count as of the recent quarter was 103 million, the fully diluted shares count figure is roughly 380 million, according to filings. Options yet to be vested make up the discrepancy.

The company’s biggest shareholders include Clayton Dubilier & Rice, which has 26% of shares outstanding, followed by Fidelity, which has about an 8% stake, according to data compiled by Bloomberg.

Short interest fell by two million shares over the last month but still accounts for almost half of the available shares, according to financial analytics firm S3 Partners.

Wailes said overall liquidity as of the fourth quarter is supportive of SmileDirectClub’s international growth plans. He said that monetizing receivables is an option, but the company is looking for the right buyer and the right price.

On SmileDirectClub’s docket is a non-deal roadshow, during which it will lay out its future for 2020 and beyond to attract a fresh investor base. International growth will likely be a focus, and Wailes remains confident despite the shroud of uncertainty as coronavirus fears sweep global markets.

“We’re in the early stages of massive opportunity,” he said. “We’re just getting started and we’re the leading player in the space today.”

To contact the reporter on this story: Crystal Kim in New York at ckim426@bloomberg.net

To contact the editors responsible for this story: Courtney Dentch at cdentch1@bloomberg.net, Catherine Larkin, Kristine Owram

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