Charles River Laboratories International, Inc. CRL is well-poised to grow in the coming quarters, backed by the strong potential of the RMS (Research Models and Services) segment. The robust performance of the safety assessment business is contributing to the DSA (Discovery and Safety Assessment) arm’s growth. Favorable solvency also generates optimism.
However, headwinds related to foreign exchange fluctuations and the impacts of macroeconomic challenges are concerning for CRL’s operations.
In the past year, this Zacks Rank #3 (Hold) stock has increased 34% compared with the 7.8% rise of the industry and 32.9% growth of the S&P 500 composite.
Operating as a full-service, early-stage contract research organization, Charles River has a market capitalization of $13.55 billion. The company has an earnings yield of 4.16% compared with the industry’s 1.89%. CRL surpassed estimates in each of the trailing four quarters, delivering an average earnings surprise of 7.07%.
Let’s delve deeper.
Upsides
RMS Business Continues to Grow: RMS business services are in high demand among Charles River’s clients in the field of basic research and screening of non-clinical drug candidates. The segment continues to benefit from broad-based growth in all geographic regions for small research models. Through the majority of 2023, the company witnessed strong growth within the insourcing solutions business led by the CRADL (Charles River Accelerator and Development Labs) initiative.
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In 2024, CRL anticipates a flat to low-single-digit increase in RMS organic revenues, owing to a limited unit volume growth in North America and Europe. In China, the company expects continued healthy demand for small models and associated services. The November 2023 acquisition of Noveprim, an NHP provider of Mauritius, is expected to drive meaningful margin improvement in the RMS segment.
DSA Arm Thrives: CRL is gaining from its extensive expertise in the discovery of preclinical candidates and the design, execution and reporting of safety assessment studies for numerous types of compounds, including cell and gene therapies, and small and large molecule pharmaceuticals. These services are in high demand, driven by the needs of large global pharmaceutical companies that are transitioning to an outsourced drug development model, mid-size and emerging biotechnology companies, industrial and agrochemical companies and non-governmental organizations that rely on outsourcing.
In 2023, DSA revenues increased 7.9% on an organic basis, banking on continued strong performance within the safety assessment business. The company expects flat to low-single-digit organic revenue growth in DSA in 2024. Following a soft first quarter, study volume is expected to improve thereafter.
Stable Solvency Structure: Charles River exited the fourth quarter of 2023 with cash and cash equivalents of $277 million and did not have any short-term payable debt on its balance sheet. Meanwhile, the total debt was $2.65 billion compared with $2.71 billion at the end of 2022. The company has a debt-to-capital ratio of 42.4% compared with 43.2% at the end of the third quarter of 2023.
Downsides
Foreign Exchange Translation Impacts Sales: Foreign exchange is a major headwind for Charles River as a considerable percentage of its revenues comes from outside the United States. The strengthening of the Euro and some other developed market currencies has been constantly hampering the company’s performance in international markets.
Macroeconomic Challenges: A significant chunk of Charles River’s RMS and DSA revenues is generated in China, making its operations vulnerable to any trade conflicts between the United States and China. Further, the Manufacturing Solutions segment is experiencing softness across broader end markets due to a post-COVID-19 slowdown from biopharma manufacturers, CDMOs and their suppliers. These market conditions more noticeably impacted the Microbial Solutions business in 2023.
Clients, particularly CDMOs, are cutting costs as part of their COVID-19 destocking efforts and reducing testing volumes. The global biopharma demand environment is also affecting the Endosafe endotoxin testing product line in Microbial Solutions.
Estimate Trend
The Zacks Consensus Estimate for Charles River’s 2024 earnings has moved up from $10.94 to $11.00 in the past 30 days.
The Zacks Consensus Estimate for the company’s 2024 revenues is pegged at $4.22 billion, which suggests a 2.2% increase from the year-ago reported number.
Key Picks
Some better-ranked stocks in the broader medical space are Cardinal Health CAH, Stryker SYK and DaVita DVA.
Cardinal Health has a long-term estimated earnings growth rate of 14.2% compared with the industry’s 11.6%. CAH’s earnings surpassed estimates in each of the trailing four quarters, the average surprise being 15.64%. Its shares have increased 59.1% compared with the industry’s 17.9% rise in the past year.
CAH carries a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Stryker, carrying a Zacks Rank #2 at present, has an earnings yield of 3.31% against the industry’s -0.76%. Shares of the company have increased 30.7% compared with the industry’s 10.8% rise over the past year.
SYK’s earnings surpassed estimates in each of the trailing four quarters, the average surprise being 5.09%. In the last reported quarter, it delivered an average earnings surprise of 5.81%.
DaVita, sporting a Zacks Rank #1 at present, has an estimated long-term earnings growth rate of 12.1% compared with the industry’s 11.9%. Shares of DVA have surged 81.9% compared with the industry’s 26.9% rise over the past year.
DVA’s earnings surpassed estimates in each of the trailing four quarters, the average surprise being 35.57%. In the last reported quarter, it delivered an average earnings surprise of 22.2%.
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