2023-10-06 14:46:22 ET
Summary
- Charles River Laboratories International, Inc. shares have fallen over 20% due to a tougher 2023 outlook and divestment of the avian vaccine business.
- The company's strong momentum during the pandemic led to shares peaking at $450, but they have since fallen to around $200.
- Despite setbacks in 2023, I am re-establishing a full position in Charles River Laboratories on the back of the current enticing share price.
In November of last year, I believed that shares of Charles River Laboratories International, Inc. ( CRL ) were in price discovery. This came after the business saw slower growth being accompanied by modest margin pressure.
The selloff created a nice entry point over the summer of last year. As shares saw a quick recovery in the autumn, I was a bit in doubt whether to take profits, or hold onto my investment.
Having ended up selling part of my position, I am looking to re-establish a full position below the $200 mark here again. Shares have fallen over 20% in response to a tougher 2023 outlook amidst a divestment and stoppage of NHP shipments. These two developments mean that 2023 is somewhat of a lost year, as the current setback looks enticing enough to initiate a full position again.
A Recap
Charles River Laboratories was a $150 stock pre-pandemic, and the strong momentum in the wake of the pandemic meant that shares peaked around the $450 mark in 2021. With the strong demand reversing, shares fell to the $200 mark in the summer of 2022, but then shares recovered to $250 per share in November of last year.
Charles River is a $3 billion drug discovery, non-clinical development and manufacturing business. The company employs over 20,000 workers which facilitate biotechnology, pharmaceutical, academic and government-related clients. The business has a small overrepresentation in North America, but has substantial operations in Europe and Asia as well. Discovery activities make up for about two-thirds of revenues, accompanied by research and manufacturing activities.
The company generated $2.9 billion in sales in 2020, on which it reported earnings of around $8 per share (on an adjusted basis) based on a share count of 50 million shares. The company saw a strong 2021 as revenues rose by 21% to over $3.5 billion, with adjusted earnings up 27% to $10.32 per share. Taking advantage of the operating momentum, the company announced a $875 million deal for Cognate Biosciences, a $48 million deal for Retrogenix and a $292 million deal for Vigene Biosciences.
With net debt seen at $2.2 billion, leverage ratios came in around 3 times. 2022 looked like smooth sailing, with full year sales originally seen up another 14%, and earnings seen between $11.50 and $11.75 per share. On the back of this (anticipated) momentum, the company announced another deal, this time acquiring Explora BioLabs in a $295 million deal.
Through the summer of 2022, the company cut the full year sales guidance, with sales now seen up around 10%, a four percent cut in the guidance, due to a strong dollar. The earnings per share guidance was cut back by eighty cents to $10.70-$10.95 per share. The company largely maintained the guidance following the third quarter earnings report, as net debt of $2.75 billion was a bit high, although it would come down a bit after the company announced a $170 million divestment of the Avian vaccine business.
After deducting about $1.30 per share in stock-based compensation expense, realistic earnings just shy of $10 per share translated into a demanding 25 times multiple at $242 in November. Having bought small around $200 over the summer, I was tempted to take some profits on my position, which I partially did.
Coming Down
After CRL shares peaked around the $250 mark in November of last year, shares came down to the $200 mark by March, and shares have been trading in a relative tight range since around the $200 mark, now trading at $191 per share.
In January, Charles River announced a bolt-on deal as it acquired SAMDI Tech, with the company acquiring the remaining 80% stake in the business which it did not yet own in a $50 million deal.
In February, the company posted a 12% increase in full year sales to $3.96 billion after a very strong fourth quarter. The company posted GAAP operating profits of $651 million after no less than $147 million in amortization charges on intangible assets. GAAP earnings came in at $9.48 per share, as adjusted earnings of $11.12 per share topped the revised guidance.
The guidance for 2023 was impacted by a range of items. The company decided to suspend its non-human primate ((NHP)) shipments after it received a subpoena from the Department of Justice, with that move set to cut full sales growth by 2-4%. Moreover, the divestment of the avian vaccine business was set to cut adjusted earnings by $1.20-$1.40 per share.
Hence, full year reported sales growth is seen at a midpoint of 3%, with adjusted earnings seen between $9.70 and $10.90 per share, with the decline mostly due to the divestment.
In May, Charles River posted a more than 12% increase in first quarter sales to $1.03 billion, with adjusted earnings up a percent to $2.78 per share. Following a resilient quarter, the company hiked the full year guidance in a minimal fashion, hiking the lower end of the adjusted earnings guidance to $9.90 per share.
By August, Charles River reported second quarter sales of $1.06 billion, up 9% on the year before. Non-GAAP earnings fell eight cents to $2.69 per share which means that earnings so far this year are down five cent to $5.47 per share, despite the dilution incurred from the sale of the avian vaccine business.
The company hiked the guidance again, now seeing full year sales up by a midpoint of 3.5%, with the lower end of the adjusted earnings guidance hiked by forty cents, with earnings now seen between $10.30 and $10.90 per share. Net debt is flattish at $2.48 billion and with EBITDA trending at around $900 million, leverage ratios come in comfortably below 3 times, certainly manageable.
And Now?
With Charles River Laboratories International, Inc. realistic earnings still trending around $9.50 per share, after deducting just over a dollar per share in stock-based compensation expenses, valuation multiples have compressed a great deal. This makes that a 25–26 times multiple this time last year has compressed to 20 times again.
Having sold out of part of my position near $250 last year in November, it is time to reload on Charles River again. While 2023 is a bit of a lost year due to the divestment of the avian vaccine business and the issue around non-human primate supply issues, it could be expected that growth returns and continues in 2024.
Given the pullback, I am quite enticed by Charles River Laboratories International, Inc. shares here, looking to reestablish a full position again.
For further details see:
Charles River Laboratories: Diving Into The Lab (Rating Upgrade)