Charles River Earnings: Near-Term Macro Headwinds Have Impact on Backlog; Positive Long-Term Outlook

Charles River Laboratories CRL reported second-quarter results highlighted by revenue of $1.06 billion, representing a 9% increase compared to the prior year period. Charles River is tracking our expectations for the year, and we maintain our fair value estimate of $260 per share. We view the stock as undervalued, currently trading in 4-star territory, about 17% below our fair value estimate. We reaffirm our narrow moat rating, which is based on intangible assets and switching costs associated with its animal research models and its preclinical discovery and safety assessment services.

We forecast over $4.1 billion in revenue for 2023, representing an increase of about 3.6% over 2022, and we maintain our positive long-term outlook for Charles River, based on steadily increasing demand for preclinical outsourcing services and the company’s leading position in the industry. Furthermore, we forecast revenue growth in the midsingle digits to lower-double digits throughout our 10-year forecast period.

As of quarter-end, the discovery and safety assessment segment had a backlog of $2.8 billion, representing a modest decline from $3 billion at the end of the first quarter. This trend is reflective of macroeconomic headwinds and biotech funding uncertainty, which is leading to reprioritizations of clients’ pipelines and tightened research and development budgets. During the peak demand environment during the COVID-19 pandemic, clients booked studies far in advance of when the work would be required. We view the higher cancellation levels and decreasing backlog as a reversion to prepandemic levels, and we think that as these return to normal, the backlog will more reliably reflect the actual study demand. We are pleased to see that Charles River’s incoming new business awards that are not adjusted for cancellations remain robust, resulting in a gross book/bill ratio above 1 times in the second quarter.