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Charles River (CRL) Gains From Growing Demand Amid Macro Woes

Charles River CRL gains on strong organic revenue growth and robust demand from biotech as well as pharmaceutical clients. The global business environment continues to be challenging. A dull Cell Supply business might dampen top-line growth. The stock carries a Zacks Rank #3 (Hold).

Charles River exited the second quarter of 2022 with better-than-expected earnings. The results highlighted 9.5% organic revenue growth, driven by strength across the DSA and Research Models and Services RMS business segments.

In the second quarter, RMS revenues increased 8.5% organically year over year, in line with the company’s high single-digit outlook for 2022. Organic revenue growth was driven by strong demand and meaningful price increases in the Research Models business in North America, as well as for Global Research Models Services, particularly Insourcing Solutions and GEMS. China continued to perform well but the growth rate was impacted by COVID-related restrictions in the Beijing and Shanghai region.

This segment reported 12.9% organic revenue growth in the second quarter of 2022. The DSA organic growth rate improved nearly 340 basis points from the first-quarter level and reached the low double-digit range. This was driven by the Safety Assessment business, which continued to benefit from strong business trends such as higher pricing and increased demand. Based on demand and backlog trends, including working through higher pricing that is already booked, Charles River continues to expect that the growth rate will approach 20% in the second half of 2022, tracking to its initial plan. Higher demand and meaningful price increases led to sequential growth acceleration in the Safety Assessment business in the second quarter.

Charles River Laboratories International, Inc. Price

Charles River Laboratories International, Inc. Price
Charles River Laboratories International, Inc. Price

Charles River Laboratories International, Inc. price | Charles River Laboratories International, Inc. Quote

For 2022, the company continues to expect the DSA segment to be the primary driver of modest operating margin improvement as leverage from the accelerated DSA growth rate offsets higher compensation costs.

Operating margin expansion and meaningful cash flow generation were the other upsides. We expect the company to register a 4.8% improvement in adjusted net income in 2022 on 10.2% revenue growth.

A revenue decline in the CDMO business, as well as a challenging prior-year comparison for the Biologics Testing and Microbial Solutions businesses in the second quarter, dragged Manufacturing Solutions revenues down. The Manufacturing segment's operating margin declined 460 basis points to 28.6% as a result of the expense escalation within the CDMO business.

The significant slash in 2022 guidance reflects headwinds associated with the CDMO business, unfavorable foreign exchange due to the strengthening U.S. dollar and interest expense due to the rising interest rate environment, increases concern.

In the pandemic period, the company’s Cell Supply business is facing issues related to donor access. The Cell Supply business, including the HemaCare and Cellero, continued to be impacted by donor availability constraints, which failed to recover from COVID-related restrictions completely.

Over the past year, Charles River has been underperforming its industry. The stock has declined 51.7% compared with the industry’s 33.2% plunge.

Key Picks

A few better-ranked stocks in the broader medical space that investors can consider are AMN Healthcare Services, Inc. AMN, ShockWave Medical, Inc. SWAV and McKesson Corporation MCK.

AMN Healthcare has a long-term earnings growth rate of 3.2%. The company surpassed earnings estimates in the trailing four quarters, delivering a surprise of 15.7%, on average. It currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

AMN Healthcare has outperformed its industry in the past year. AMN has lost 4.2% compared with the industry’s 35.9% fall.

ShockWave Medical, sporting a Zacks Rank #1 at present, has an estimated growth rate of 33.1% for 2023. The company’s earnings surpassed estimates in all the trailing four quarters, the average beat being 180.1%.

ShockWave Medical has outperformed its industry in the past year. SWAV has gained 33.4% against the industry’s 31.4% fall in the past year.

McKesson has an estimated long-term growth rate of 9.9%. The company surpassed earnings estimates in the trailing three quarters and missed in one, delivering a surprise of 13%, on average. It currently carries a Zacks Rank #2 (Buy).

McKesson has outperformed its industry in the past year. MCK has gained 71.5% against the industry’s 15.1% fall.

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