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Why Is Charles River (CRL) Down 14.8% Since Last Earnings Report?

A month has gone by since the last earnings report for Charles River Laboratories (CRL). Shares have lost about 14.8% in that time frame, underperforming the S&P 500.

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

Charles River Q4 Earnings Beat Estimates, Margins Down

Charles Riverreported adjusted earnings per share of $2.98 for fourth-quarter 2022, reflecting a 19.7% rise from the year-ago earnings. Nevertheless, the metric surpassed the Zacks Consensus Estimate by 8.4%.

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In the quarter, lower operating margins, increased interest expenses and a higher tax rate impacted the bottom line.

On a GAAP basis, earnings increased 36.7% year over year to $3.65 per share.

For the full year, adjusted earnings per share were $11.12 per share, up 7.8% from the year-ago period’s levels. The figure lagged the Zacks Consensus Estimate by 3.5%.

Revenues

Revenues in the third quarter totaled $989.2 million, beating the Zacks Consensus Estimate by 1.1%. The top line improved 10.4% from the year-ago number (up 15.3% organically, excluding the impact of acquisition, divestiture and foreign currency translation).

Total revenues for 2022 were $3.98 billion, up 12.3% from the year-ago period’s levels. The figure lagged the Zacks Consensus Estimate by 8%.

Segment in Detail

Charles River’s fourth-quarter total Research Models and Services (RMS) revenues of $196.1 million were up 18.4% year over year (up 10.8% organically). Organic revenue growth was driven by robust demand for research model services, particularly the Insourcing Solutions (IS) business, as well as higher revenue for small research models in North America and China.

Discovery and Safety Assessment (DSA) revenues of $691.7 million rose 29.5% (up 26.5% organically). Organic revenue growth was mainly driven by broad-based growth in the Safety Assessment business on meaningful price increases and higher study volume.

Manufacturing Solutions revenues totaled $212.1 million, up 3.3% year over year (up 5.3% organically). Organic revenue growth was fueled by robust demand in the Biologics Testing Solutions and Microbial Solutions businesses, partially offset by a revenue decline in the CDMO business.

Margins

The gross profit in the reported quarter was $398.8 million, up 14.9% from the prior-year quarter. However, the gross margin of 36% contracted 209 basis points (bps) year over year on a 25.6% rise in the total costs of the company.

Meanwhile, selling, general & administrative expenses rose 38.5% to $199.6 million.

Adjusted operating income totaled $199.2 million, reflecting a 1.9% drop from the prior-year quarter. The adjusted operating margin in the fourth quarter contracted 431 bps to 18.1%.

Liquidity and Cash Position

Charles River exited 2022 with cash and cash equivalents of $233.9 million compared with $241.2 million at the end of 2021.

Cumulative net cash provided by operating activities at the end of 2022 was $619.6 million compared with the prior-year quarter’s $760.8 million.

2023 Guidance

The company has provided its 2023 guidance.

For 2023, the revenue growth is expected in the band of 1.5-4.5% on a reported basis. Organic revenue growth is expected in the range of 4.5-7.5%. The Zacks Consensus Estimate for total revenues is pegged at $4.15 billion, indicating a 5.9% rise from 2022.

Adjusted earnings per share for 2023 is expected in the range of $9.70-$10.90. The current Zacks Consensus Estimate is pegged at $11.37.

How Have Estimates Been Moving Since Then?

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

VGM Scores

At this time, Charles River has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. 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. It's no surprise Charles River has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.

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