Charles River Labs: The Short-Term Headwinds Will Eventually Be Long-Term Tailwinds

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WG Investment Research


  • Charles River reported Q1 2020 results that beat the top and bottom line estimates.
  • The COVID-19-related headwinds will impact Charles River's results over the next few quarters, but the company is positioned to eventually benefit from the disruptions in the industry.
  • This small-cap drug discovery and early-stage development company has a great long-term story to tell. Additionally, I believe that the company's investment thesis keeps getting stronger.
  • We are long Charles River, and we are looking to add to our position later in 2020.

Charles River Laboratories' (NYSE:CRL) stock has performed well so far in 2020 (this is one of the few stocks in my portfolio that are actually up on the year).

ChartData by YCharts

And it helps the bull case that the company's Q1 2020 results were well-received by the market, even with management ratcheting down their full-year 2020 guidance.

I believe that Charles River's long-term investment thesis remains intact. Therefore, look no further than this contract research organization ("CRO") if you are trying to find a company that will eventually benefit from the COVID-19 disruptions.

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The Latest, Results Will Be Under Pressure But The Long-term Thesis May Be Stronger

On May 7, 2020, Charles River reported strong Q1 2020 results that beat the top and bottom line estimates. The company reported adjusted EPS of $1.84 (beat by $0.38) and revenue of $707.1mm (beat by $14.95mm), which also compares favorably to the year-ago quarter.

Source: Q1 2020 Earnings Slides

The highlights:

  • Revenue increased by 17% YoY (~8% organically).
  • The company's largest operating unit, Discovery and Safety Assessment ("DSA"), reported revenue growth of 24% (~12% organically).
  • Adjusted EPS increased by 31% YoY (prior acquisitions came into play here).

The company reported solid operating results but, as expected, investors were most concerned about how Charles River was positioned to deal with the COVID-19-related headwinds, and rightfully so. But, management was prepared for the discussion and they did a great job highlighting the steps that have already been taken to deal with the economic uncertainty caused by the spread of the virus.

Management disclosed that they have almost $900mm in borrowing capacity (after drawing down $150mm), they plan to slow the pace on the M&A front and have implemented other direct cost-saving initiatives (mostly within the RMS operating unit). Simply put, management was able to properly position the company

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.

Additional disclosure: Disclaimer: This article is not a recommendation to buy or sell any stock mentioned. These are only my personal opinions. Every investor must do his/her own due diligence before making any investment decision.

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