About Charles River
When I found out what Charles River Laboratories does in order to make money, I felt pretty bad.
I originally learned about the company through shuffling through Nat Simons’ hedge fund, yes, the son of one of the greatest investors and hedge fund managers of all time and basically the godfather of quantitative and high-frequency trading, the late and great Jim Simons, and found that one of Simons’ largest positions happened to be Wilmington, Massachusetts-headquartered Charles River Laboratories (NYSE: CRL).
Emphasis on the “rat” in “laboratories,” I might add.
No, really, because this company is definitely also into some rather intense monkey business too (sorry, I had to go there, and you’ll see why momentarily), being that its primary function is to serve and support the pharmaceutical industry by breeding animals used to test potential treatments and both negative and positive effects thereof, and then selling these poor furry little creatures to major pharmaceutical companies, among a few other non-core market clients that operate in the food manufacturing sector.
Now, at the risk of losing a few viewers, I am willing to admit that I am a carnivore at heart and while one might not instantly deem me as being someone who cares about our furry little friends, some of the reports and allegations against Charles River are quite haunting, with one case of nearly three dozen monkeys being overheated and essentially (accidentally) baked to death in one of the company’s facilities in Nevada, and sadly this is truly just one of many reports and heinous allegations against Charles River.
Animal testing seems very icky, but if I were to put on my “most objective human” hat on, I get it, with the primary rationale being that better animals get tested first than humans, particularly in the event of any major adverse effects and outcomes.
But believe me when I say I understand the other side of the coin as well.
From rats, monkeys, mice and a gamut of a bunch of other animals, this is what Charles River does and how it makes money.
Regardless of how you feel on this obviously touchy matter, this is the short and long of what Charles River does, and I do think that with the continued emergence of biotechnology and biopharmaceutical companies all around the world, they’ll always need to comply with the Food and Drug Administration’s (FDA) compliance methods and procedures and Charles River allows them to successfully do that, hence the general demand tailwind being in place, given the research I’ve done on the company and the industry it works within and those that it serves.
Also, the basic fact of the matter is that many (not all, of course) major pharmaceutical corporations are recession resistant and until the end of time, the Pfizers and Mercks of the world will continue needing a storied partner like Charles River in order to continue getting their current and new drugs through their respective pipelines and onto the marketplace, yet again, acting as another longer-term tailwind.
Say what you want about the company from an ethical standpoint, but I haven’t encountered a company that is prone to being recession proof like this one in a very long time.
This being the case, let’s check up on the company’s core financials and other ratios and metrics alike and determine just how well this company is doing from a strict financial perspective, in hopes of ultimately devising an opinion as to whether or not Charles River’s shares (NYSE: CRL) are trading at investable levels and, more importantly, is it worth pondering an investment in to begin with.
Charles River’s stock financials
In introducing Charles River Laboratories through the lens of its finances, according to its market capitalization it is a $10.52 billion company with a stock price of $203.73, a price-to-earnings (P/E) ratio of 24.3, while also paying its investors an annual dividend to the tune of $0.00.
On the dividend front, I get it.
Even though this is a larger, more established veteran company in the space (founded in 1947), the company’s management team is seemingly intent on reinvesting much of its excess cash flows back into its business, particularly back into pertinent research and development (R&D) initiatives that allow the company to stay well ahead of the competition.
This is just a very common occurrence in the pharmaceutical space, as I’ve pointed out in previous stock analysis articles, and I am totally okay with that.
As it relates to the company’s present price-to-earnings ratio, it is most definitely in an interesting spot, as the company’s stock (NYSE: CRL) is technically trading above its fair, intrinsic value, however, not by a wide margin at all, only a few points above the commonly ascribed to fair value benchmark of 20, therefore, if there does happen to be some tangible revenue growth and/or other positives pushing this company forward, such discoveries could reasonably justify overpaying just a hair over for an ownership stake in Charles River.
In learning more about this company, it can be found through its balance sheet that its executives are at the helm of almost $8.2 billion in terms of total assets along with approximately $4.6 billion in terms of total liabilities, telling me that this veteran company has a veteran balance sheet, maintaining a comforting amount of total assets relative to its liabilities, offering itself ample capital to reinvest back into the company and its research solutions, buy back stock and/or also acquire smaller competitors, which are all positives and evident options this company maintains given the strength of its balance sheet.
Regarding the company’s income statement, Charles River’s annual revenues spanning between and during 2019 and 2023 have actually been growing each and every year at a brisk pace, starting off at a relative bottom of $2.6 billion in 2019, rising towards the top to its latest reported annualized revenue figure of $4.1 billion, per its report in 2023. It is an indisputable positive that an older company such as this one is still able to grow its revenues at this consistent and significant of a rate, and it also generally confirms my initial statement regarding continued heightened demand for this company’s products and services.
Now, hopefully this seasoned company is turning over a good deal of cash in the process.
Drifting on over towards the company’s cash flow statement, Charles River’s total cash from operations figures during this exact same time period have been generally trending upward, standing at $481 million in 2019, $547 million in 2020, $761 million in 2021 (evidently, the public onset of COVID-19 was an inherent tailwind for the firm, which makes sense), $620 million in 2022, leading up to its latest reported figure of $684 million, per its report in 2023.
With this, I’d say as long as cash flows tend to be moving on up over a span of five or so years, this is a positive, as whether you are the world’s largest and most established pharmaceutical company or one that is brand new and comprised of a few biotech nerds from Stanford, cash flows tend to vary given just how much companies in this arena opt to invest and reinvest back into their respective companies each quarter and year for that matter, and there are certainly times to invest and take a bit out of your cash flows but there also times to sit on the sidelines and allow some cash to pile up as well.
All things considered, while not exactly linear, Charles River’s total cash from operations fit a strong and overall consistent mold.
Charles River’s stock fundamentals
According to Charles Schwab’s platform, Charles River’s net profit margin is pegged at a figure of 10.93%, and when considering a competitor such as Agilent Technologies, as this company is also involved with animal testing in and for the pharmaceutical space, and how it has a net profit margin of an objectively higher 18.84%, it certainly appears as though cost pressures could be weighing a bit heavy on Charles River, as it has been reported that the company has experienced a recent decline in sales during the second quarter of 2024, leading to pressure being imposed on its margins in the short-term.
Nevertheless, when it comes to considering an investment, I am always playing with the long game in mind, and these temporary pressures could very well present a long-term opportunity for those that are a bit more patient than the rest of the herd, as regardless of a single quarter, this company does indeed have a lot of pricing power and financial say-so, especially when incorporating the current choice condition of its balance sheet.
This is why I am not getting too hung up on the company’s decent, but not great net profit margin, so long as, of course, improvements are actually made within the next five or so years, maximum, which I believe is more than feasible for a company with such pricing power and prowess in the animal testing and greater overall pharmaceutical supplier spaces.
Also, given how massive this company is, it shouldn’t be terribly challenging for it to find tangible divisions and/or elements of its business that aren’t as lucrative and subsequently get rid of them by means of selling them off to another company.
Should you buy Charles River stock?
Perhaps one views this company’s stock (NYSE: CRL) as a “sell” on the basis of morality.
That’s alright, no one ever said that every single publicly traded company was a moral one.
Quite the opposite, usually.
From a strict financial perspective, I like that this company admittedly has a lot of breathing room, as can be especially seen through its trim balance sheet, and I also enjoy finding that Charles River’s most recent annual revenue sales figures have been growing each and every year, at a handsome rate at that, and its cash flows have been in an expectedly general growth phase during the same timeframe, although not growing off of each previous year, but moving up over the span of a handful of years, largely commensurate with the rest of the pharmaceutical space, however, with its current valuation, I just don’t see enough in terms of catalysts to warrant overpaying for the stock right now.
Yes, the company will likely continue growing its revenues through current and new clients that need animal testing, but in this market environment, it doesn’t feel prudent nor sensible to pay a premium for growth that has seemingly already been priced into the stock.
Hence, the ever so deserved “hold” rating.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.
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