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Charles River (CRL) Up 19.7% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Charles River Laboratories (CRL). Shares have added about 19.7% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Charles River due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Charles River Q3 Earnings Beat, Guidance Narrowed

Charles River reported third-quarter 2023 adjusted earnings per share of $2.72, which reflected a 3.4% increase year over year. The metric surpassed the Zacks Consensus Estimate by 15.7%.

On a GAAP basis, however, earnings declined 10.1% year over year to $1.69 per share.

The year-over-year decline in GAAP earnings was primarily due to site consolidation and associated costs as well as non-operating items, including a loss on certain venture capital and other strategic investments, increased interest expense and a higher tax rate.

Revenues

Revenues in the third quarter totaled $1.03 billion, beating the Zacks Consensus Estimate by 3%. The top line improved 3.8% from the year-ago quarter (up 4.1% organically, excluding the impact of acquisition, divestiture and foreign currency translation).

Segments in Detail

Charles River’s third-quarter total Research Models and Services (RMS) revenues of $186.8 million were up 3.7% year over year (up 3.2% organically). Organic revenue growth was primarily driven by research model services, particularly the Insourcing Solutions business. Our model estimated the RMS business to grow 12.6% on a reported basis (13.9% growth organically) in the third quarter.

Discovery and Safety Assessment (DSA) revenues of $664 million rose 7.2% (up 5.3% organically). Organic revenue growth was mainly driven by growth in the Safety Assessment business on meaningful price increases and higher study volume. Going by our model, the DSA business was expected to register 1.8% growth in the third quarter (1% growth organically).

Manufacturing Solutions revenues totaled $175.7 million, down 7.3% year over year (up 0.9% organically). Organic revenue growth was primarily driven by contract development and manufacturing organization businesses.This was almost entirely offset by lower revenues in the Biologics Testing Solutions and Microbial Solutions businesses.

Margins

Gross profit in the reported quarter was $361.8 million, down 2.3% from the prior-year quarter. Gross margin of 35.3% contracted 218 basis points (bps) year over year on a 7.4% rise in total costs of the company.

Selling, general & administrative expenses rose 4.1% to $176.1 million.

Adjusted operating income totaled $185.7 million, reflecting a 0.4% decline from the prior-year quarter. The adjusted operating margin in the third quarter contracted 76 bps to 18.1%.

Liquidity and Cash Position

Charles River exited the third quarter with cash and cash equivalents of $157.1 million, compared with $200.4 million at the end of the second quarter.

Cumulative net cash provided by operating activities at the end of the third quarter was $462.9 million compared with the prior-year period’s $384.9 million.

2023 Guidance

The company has narrowed its 2023 guidance.

For 2023, revenue growth is now expected in the band of 2.5-3.5% (from the earlier band of 2.5-4.5%) on a reported basis. Organic revenue growth is expected in the range of 5.5-6.5% (5.5-7.5%). The Zacks Consensus Estimate for total revenues is pegged at $4.11 billion, indicating a 3.5% rise from 2022.

Adjusted earnings per share for 2023 is now expected in the range of $10.50-$10.70 ($10.30-$10.90 expected previously). The current Zacks Consensus Estimate is pegged at $10.49.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision.

The consensus estimate has shifted -8.2% due to these changes.

VGM Scores

At this time, Charles River has a subpar Growth Score of D, a grade with the same score on the momentum front. However, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Charles River has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

Performance of an Industry Player

Charles River belongs to the Zacks Medical Services industry. Another stock from the same industry, AMN Healthcare Services (AMN), has gained 13.6% over the past month. More than a month has passed since the company reported results for the quarter ended September 2023.

AMN Healthcare reported revenues of $853.46 million in the last reported quarter, representing a year-over-year change of -25%. EPS of $1.97 for the same period compares with $2.57 a year ago.

For the current quarter, AMN Healthcare is expected to post earnings of $1.23 per share, indicating a change of -50.4% from the year-ago quarter. The Zacks Consensus Estimate has changed -2.8% over the last 30 days.

The overall direction and magnitude of estimate revisions translate into a Zacks Rank #3 (Hold) for AMN Healthcare. Also, the stock has a VGM Score of A.

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