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Here's Why Investors Should Retain Charles River (CRL) Now

Charles River Laboratories International, Inc. CRL is gaining from robust performances across the Research Models and Services (RMS) and Discovery and Safety Assessment (DSA) segments. The company’s noteworthy collaborations to expedite the discovery process instill optimism. A good solvency position also continues to favor the stock. However, stiff rivalry and unfavorable foreign exchange movements do not bode well.

In the past year, the Zacks Rank #3 (Hold) stock has declined 42% compared with the industry’s 47.4% plunge and a 12.4% decline of the S&P 500.

The full-service, early-stage contract research organization has a market capitalization of $11.12 billion. The company projects 14% growth for the next five years compared with the industry and the S&P 500’s projected growth rate of 16.3% and 11.3%, respectively. Its earnings surpassed estimates in the trailing four quarters, delivering an average surprise of 4.66%.


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Let’s delve deeper.

Factors at Play

RMS Business Rebounds: In the first quarter, the segment’s revenues increased 8.7% organically year over year. The figure is in line with the company’s high single-digit outlook for 2022. Organic revenue growth was driven by broad-based demand and meaningful price increases in the Research Model business, particularly in North America. Research Model Services was also a significant contributor to the segment's growth, led by the Insourcing Solutions (IS) business.

The Charles River Accelerator and Development Labs (CRADL) initiative, which is part of the IS business, further accelerated growth in the RMS segment as small and large biopharmaceutical clients are seeking to rent turnkey research capacity in key biohubs.

DSA Arm Continues to Thrive: Charles River expects the DSA segment to be the primary driver of modest operating margin improvement in 2022. The segment reported 9.5% organic revenue growth in the first quarter. Organic growth rate improved by nearly 300 basis points sequentially, driven by the Safety Assessment business that continued to benefit from strong business trends like higher pricing and increased demand. The company is also partnering with Valo Health and SAMDI Tech to further expand the discovery process.

Stable Solvency Structure: Charles River exited the first quarter of 2022 with cash and cash equivalents of $242 million. Total debt at the end of the quarter stood at $2.67 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, much lower than the present level of cash in hand. This is good news in terms of the company’s solvency position, particularly during the year of economic downturn, when it is majorly facing a manufacturing and supply halt globally.

Downsides

Forex Woes: Foreign exchange is a major headwind for Charles River due to a considerable percentage of its revenues coming from outside the United States. For 2022, the impact of foreign currency translation is expected to reduce revenues by 1.5%.

Macroeconomic Headwinds: A significant portion of Charles River’s RMS and DSA businesses is based in China. Any trade policy-related conflict between the United States and China might hamper the company’s business developments in this region.

Competitive Landscape: Charles River competes in the marketplace on the back of its therapeutic and scientific expertise in early-stage drug research, quality, reputation, flexibility, responsiveness, pricing, innovation and global capabilities. The company primarily faces a broad range of competitors of different sizes and capabilities in each of its three business segments.

Estimate Trend

Over the past 30 days, the Zacks Consensus Estimate for Charles River’s 2022 earnings has moved down by 2.6% to $11.60.

The Zacks Consensus Estimate for the company’s 2022 revenues is pegged at $4.04 billion, suggesting a 14.1% rise from the 2021 reported number.

Key Picks

A few better-ranked stocks in the broader medical space that investors can consider are AMN Healthcare Services, Inc. AMN, Novo Nordisk NVO and Merck & Co., Inc. MRK.

AMN Healthcare has a long-term earnings growth rate of 1.1%. The company surpassed earnings estimates in the trailing four quarters, delivering a surprise of 15.6%, 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.

AMN Healthcare has outperformed its industry in the past year. AMN has gained 17.3% against the industry’s 47.4% fall.

Novo Nordisk has a long-term earnings growth rate of 14.5%. The company surpassed earnings estimates in the trailing four quarters, delivering a surprise of 7.6%, on average. It currently flaunts a Zacks Rank #2 (Buy).

Novo Nordisk has outperformed its industry in the past year. NVO has gained 31.2% against the industry’s 16.9% growth.

Merck has a long-term earnings growth rate of 10.1%. The company surpassed earnings estimates in the trailing three quarters and missed in one, delivering a surprise of 13.4%, on average. It currently carries a Zacks Rank #2.

Merck has outperformed its industry in the past year. MRK has gained 18.4% against the industry’s 17% growth.


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