Charles River Earnings: Healthy Demand and Pricing Gains Drive Growth; Shares Undervalued

Charles River Laboratories CRL reported solid first-quarter results highlighted by revenue of $1.03 billion, representing a 12% increase compared with the prior-year period. Charles River’s strong start to the year was due to healthy demand and pricing gains globally. Investors reacted positively to the results and sent the stock up 5%. We maintain our fair value estimate of $260 per share, and we view the stock as undervalued, currently trading in 4-star territory. We reaffirm our narrow moat and stable moat trend ratings, which are based on the company’s strong competitive advantages and expansive offerings of preclinical services.

We forecast over $4.1 billion in revenue for 2023, and we maintain our positive long-term outlook for Charles River based on robust demand and its leading position in the preclinical Contract Research Organization space, which support its narrow moat rating. Due to the continued supply chain issues associated with nonhuman primates, we anticipate 2023′s operating margin will be slightly down from 2022′s16.4% operating margin. Longer-term, we forecast there will be operating margin improvement thanks to a combination of leverage from higher volume, pricing, and continuing to drive efficiency.

As of quarter-end, the discovery and safety assessment segment had a backlog of $3 billion, which is a modest decrease from $3.15 billion at year-end 2022. Management stated this trend is reflective of the normalization of booking and proposal activity since clients are no longer booking work as far in advance as they did during the COVID-19 pandemic.

Charles River’s narrow moat is based on intangible assets and switching costs associated with its leading animal research models and its discovery and safety assessment services. Charles River worked on more than 80% of U.S. Food and Drug Administration-approved drugs between 2020 and 2022, which further demonstrates the company’s expansive reach across the industry.