Charles River Laboratories International, Inc. CRL has been gaining from strength in the Research Models and Services (RMS) and Discovery and Safety Assessment (DSA) segments. The company’s noteworthy collaborations to accelerate the discovery process buoy optimism. A strong solvency position is an added upside. However, foreign exchange fluctuations and other macroeconomic woes raise apprehension.
Over the past year, the Zacks Rank #3 (Hold) stock has declined 0.9% against a 55.2% fall of the industry and a 9% rise of the S&P 500.
The full-service, early-stage contract research organization has a market capitalization of $15.36 billion. Charles River’s earnings for the fourth quarter of 2021 surpassed the Zacks Consensus Estimate by 2.9%.
Over the past five years, Charles River’s earnings grew 17.7%, way ahead of the industry and S&P 500’s 12.2% and 2.8% increase, respectively. The company projects 14% growth for the next five years compared with the industry and the S&P 500’s projected growth rate of 19% and 11%, respectively.
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Let’s delve deeper.
Factors at Play
RMS Business Rebounds: We are upbeat about the RMS segment that registered 13.3% revenue growth organically year over year in the fourth quarter despite the impact of the RMS Japan divestiture. Organic revenue growth was driven by robust demand for research models, particularly in China, as well as higher revenues from research model services. The pandemic-led favorable year-over-year comparison contributed 2.3% on a reported and organic basis to RMS’ revenue growth in the fourth quarter.
DSA Arm Continues to Thrive: The DSA segment reported 6.7% organic revenue growth in the fourth quarter. The upside was driven by robust demand from global biopharmaceutical and biotechnology clients in the Discovery Services and Safety Assessment businesses. Charles River’s new partnerships with Valo Health and SAMDI-Tech’s innovative assay technology are likely to expedite the discovery process.
The company currently projects the DSA segment to deliver organic revenue growth in mid-teens for full-year 2022, reflecting continued strength in early-stage research activity.
Stable Solvency Structure: Charles River exited the fourth quarter with cash and cash equivalents of $241 million. Meanwhile, total debt was $2.66 billion, much higher than the corresponding cash and cash equivalent level. However, the company has short-term payable debt of $3 million on its balance sheet, insignificant compared to the present level of cash in hand. This is good news regarding the company’s solvency position, particularly during the pandemic when it is majorly facing a global manufacturing and supply halt.
Cell Supply Business Faces Challenge: Charles River’s cell supply business faced issues related to donor access in 2021. The cell supply business, including HemaCare and Cellero, continued to be impacted by constraints on donor availability, which failed to recover from COVID-related restrictions completely.
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. In the fourth quarter, the impact of foreign currency translation reduced revenues by 0.6%.
Macroeconomic Condition: A significant chunk of Charles River’s RMS and DSA businesses is based in China. Any trade policy-related conflict between the United States and China might accordingly hamper the company’s business developments in this region.
Over the past 90 days, the Zacks Consensus Estimate for Charles River’s 2022 earnings has moved north by 1.6% to $11.64.
The Zacks Consensus Estimate for the company’s 2022 revenues is pegged at $4.03 billion, suggesting a 13.85% rise from the 2021 reported number.
A few better-ranked stocks in the broader medical space are Owens & Minor, Inc. OMI, Abiomed, Inc. ABMD and McKesson Corporation MCK.
Owens & Minor has a long-term earnings growth rate of 8.8%. Owens & Minor’s earnings surpassed estimates in the trailing four quarters, delivering a surprise of 29.5%, on average. It currently flaunts a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Owens & Minor has outperformed the industry over the past year. OMI has gained 15.3% against a 15.6% industry decline in the said period.
Abiomed has an estimated long-term growth rate of 20%. Abiomed’s earnings surpassed estimates in the trailing four quarters, the average surprise being 9.2%. It currently carries a Zacks Rank #2 (Buy).
Abiomed has underperformed the industry over the past year. ABMD has lost 5.5% against the industry’s 1% growth over the past year.
McKesson has a long-term earnings growth rate of 11.8%. McKesson’s earnings surpassed estimates in the trailing four quarters, delivering a surprise of 20.6%, on average. It presently carries a Zacks Rank #2.
McKesson has outperformed the industry over the past year. MCK has gained 69.9% in the said period compared with 9.7% growth of the industry.
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