Charles River Laboratories: Strong Results But Not Out Of The Woods Just Yet

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WG Investment Research


  • Charles River reported Q2 2020 results that beat the top and bottom line estimates. However, the company's research business contended with strong headwinds again this quarter.
  • The COVID-19-related headwinds will likely continue to impact Charles River's results in the near-term, but the company is still well-positioned for the future (the revised 2020 guidance proves it).
  • 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.

Charles River Laboratories' (NYSE:CRL) stock has performed well so far in 2020, as CRL shares are outperforming the broader market by ~35 percentage points over the last 8 plus months.

ChartData by YCharts

And it helps the bull case that the company's Q2 2020 results were well-received by the market, even after considering the fact that COVID has negatively impacted several industries that Charles River operates in. In my opinion, the investment thesis for this contract research organization remains intact.

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The Latest, Not Firing On All Cylinders But The Company Is Making Due

On August 5, 2020, Charles River reported strong[ish] Q2 2020 results that beat the top and bottom line estimates. The company reported adjusted EPS of $1.58 (beat by $0.30) on revenue of $682.6mm (beat by $43.9mm).

Source: Q2 2020 Earnings Slides

Highlights from the quarter:

  • Revenue increased by ~4% YoY (slightly over 1% organically).
  • The company's largest operating unit, Discovery and Safety Assessment ("DSA"), reported revenue growth of ~9% (~6% organically). Additionally, DSA's adjusted operating margin increased by 210bps YoY (to 23.2%).
  • The company's second largest operating unit, Research Models and Services ("RMS"), reported a decline in revenue of ~14% (~18% organic revenue loss). And the unit reported a significant drop in its adjusted operating margin (from 25.5% to 9.1%).

Investors were interested in hearing more about Charles River's liquidity last quarter, but it was a different story for Q2 2020, and rightfully so. The RMS unit continued to feel pressure in the COVID environment and, as the numbers below show, the business unit contended with stiff headwinds over the last 3 months.

Source: Q2 2020 Earnings Slides

To quantify the COVID impact, management mentioned that the virus cut revenue by the tune of ~$35mm for Q2 2020. Additionally, management touched on the fixed-cost nature of its research

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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