Charles River Laboratories: Headwinds Ahead But That's Okay

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WG Investment Research


  • Charles River reported Q3 2019 results that were well-received by the market. The company beat on the bottom-line but slightly missed the consensus revenue estimate.
  • Acquisitions and investments in operations are expected to be earnings headwinds over the next few quarters. However, I believe that the headwinds will be short term in nature.
  • Long-term shareholders should consider staying the course because, in my opinion, CRL shares will outperform the broader market over the next 18-24 months.
  • This idea was discussed in more depth with members of my private investing community, Going Long With W.G.. Get started today »

Charles River Laboratories' (NYSE:CRL) stock has performed well lately but shares are still lagging the broader market by almost 4 percentage points over the last 11-plus months.

ChartData by YCharts

However, I believe that the underperformance has created a long-term buying opportunity because, in my opinion, Charles River's most recent operating results (and guidance) show that this Contract Research Organization ("CRO") company is well-positioned for 2020 and beyond.

The Latest, Solid Results Even After Factoring In The Headwinds

On November 6, 2019, Charles River reported Q3 2019 results that beat on the bottom-line estimate but that missed on the top-line. The company reported adjusted EPS of $1.69 (beat by $0.05) on revenue of $668.0M (missed by $6.1M), which also compares favorably to the year-ago quarter.

Source: Q3 2019 Earnings Presentation

Highlights from the quarter:

  • Top-line growth of 14.1%, with solid organic revenue growth of 7.9%.
  • Adjusted operating margin of 19.4%, which was a 60bps improvement from year-ago quarter.
  • Free cash flow increased by 27.3% YoY to $120.7M.
  • GAAP EPS increased by almost 20%, while adjusted EPS increased by 16.6%.

The earnings growth was largely a result of margin expansion due to a positive mix in business, in addition to improvements made to the company's cost structure. The investments made over the last few years, coupled with the numerous acquisitions, have put Charles River in a position for future growth and greater operational efficiency. To this point, let us consider the YoY changes for each of the 3 divisions (i.e., Research Models and Services, Discovery and Safety Assessment, and Manufacturing).

Q3 2019 Q3 2018 % Chg
Revenue $132,546 $126,811 5%
Operating Income 34,385 32,121 7%
Operating Margin 26% 25% 2%
Revenue 420,079 352,257 19%
Operating Income 64,995 62,909 3%
ChartData by YCharts

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This article was written by

WG Investment Research profile picture
Our President and CIO is a CPA with experience in public accounting and the financial services industry. He earned his Master of Accountancy degree in 2008 and his B.S. in Business Management in 2007. He is also a Level III CFA candidate. He has been intrigued by the market from the start. Over the years, he has learned that long-term investing is a discipline that, if followed, will help contribute to building lasting wealth. As such, most of our articles will be about the investments that we plan to hold for at least 3 to 5 years, as long as the company's story does not change. As a Seeking Alpha contributor, our main goal is to write about the companies that are key to our portfolio with the hope of promoting discussion (for or against the investment) from others within the SA community.Please visit our website for more information about W.G. Investment Research LLC.

Disclosure: I am/we are long CRL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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