Charles River Laboratories Stock: Steady, Solid, And Growing (NYSE:CRL)

At the start of last year I concluded that Charles River Laboratories (NYSE:CRL) was powering along. Unlike many companies which are helping pharmaceutical and biotechnology names with their research and drug development efforts, Charles River did not see beneficial impact from the pandemic, as it actually has seen some headwinds.

The company has just ended a very decent 2021 as this growth and growing earnings power has been used to fuel further M&A efforts, fortifying the long term positioning of the company here, all while share price stagnation has been lowering forward valuation multiples.

The Business – The Thesis

Charles River is a more than $3 billion drug discovery, non-clinical development and manufacturing business. The business is a true global business with nearly 20,000 workers being active across more than 100 facilities in order to provide biotechnology, global pharmaceutical companies, academic, government and other clients with its services. The business generates roughly two-thirds of sales in North America, the vast majority of the remaining revenues in Europe, as it has small exposure to Asia as well.

In terms of activities it is discovery services which make up for the remainder of the business, responsible for nearly two thirds of total sales. Research model and manufacturing each make up for less than a fifth of revenues.

The sound positioning of the business and continued bolt-on M&A strategy has been the driver behind solid growth in the business and subsequently long term value creation for its shareholders.

Early in 2021 the company posted its 2020 results with revenues reported at $2.9 billion as the company earned just over $8 per share on an adjusted basis. The 50 million shares traded around the $300 mark early last year, giving the company a roughly $15 billion equity valuation, a valuation which increased by another $1.7 billion if we factored in net debt. With earnings seen around $9 per share in 2021, the valuation was demanding at 30-33 times earnings, all while the company announced a sizable purchase with the $875 million acquisition of Cognate Biosciences.

This deal was set to increase net debt to $2.6 billion, for a roughly 4 times leverage ratio, as this earnings multiple and 3 times earnings multiple made me a bit cautious, but I recognized the great positioning and long term value creation as well.

What Happened?

Since I vented my appreciation of the business in February of last year around the $300 mark, shares rallied in a huge way and in a very steady fashion to hit the $450 mark by late summer. Rising interest rates and re-rating made that shares actually fell back to the $250s in recent weeks, before now settling around the $300 mark again.

Momentum was fueled by two bolt-on deals in spring of last year. In March of last year, Charles River bought Retrogenix, a small CRO company in a $48 million deal, set to add $7 million in revenues, marking a true bolt-on deal. In May, Charles River bought Vigene Biosciences in a $292 million upfront cash deal, to enhance its gene therapies. With just a $30-$35 million revenue contribution, the deal adds just over a percent to total revenues, as this deal comes at a premium valuation as well, with distribution synergies likely providing a boost to the business.

Fast forwarding to February this year, it was apparent that Charles River has seen a great 2021. Full year revenues were up 21% to $3.54 billion. The company posted adjusted earnings of $10.32 per share, up 27% on the year before. Adjusted earnings came in at $530 million as the reconciliation of items looks fair, with exception to a $30 million stock-based compensation expense.

With earnings comfortable trending around $10 per share, multiples come in at around 30 times earnings, in line with the expectations last year as net debt was controlled at $2.2 billion, despite further deal making, with leverage ratios now coming in around 3 times.

For 2022, the company sees 13-15% revenue growth which reveals that revenues come in around $4.0 billion, with adjusted earnings set to rise to $11.50-$11.75 per share, implying that the forward earnings multiple comes in at 26 time earnings. At these levels the enterprise value has risen to $17.7 billion, working down to a reasonable 4 times sales multiple as earnings multiple have come down quite a bit, certainly when the shares have approached the $250 mark in recent weeks.

Another Bolt-On Deal

Early in April, Charles River announced another bolt-on deal with the $295 million purchase of Explora BioLabs. Explora offers contract vivarium operation services. The deal is set to add $38 million in annual sales, revealing that a reasonably high multiple has been paid, at nearly 8 times sales.

Fortunately, double-digit growth is projected as the remark that the deal is likely very modestly accretive to earnings per share reveals that the acquired activities are (solidly) profitable. It must be said that the deal is again a truly bolt-on deal, adding about a percent to pro forma sales, hence not a game changer by all means, as the leverage implications are very minimal.

With shares trading at 26 times forward earnings, multiples have compressed a bit, understandably as interest rates have moved higher as well. Hence, I am seeing (again) neutral territory here, albeit that a low of $250 which was set in recent weeks looks particularly interesting, as a near 5% earnings yield at those levels is compelling enough, given the still very sound positioning of the business. This leaves me hanging in neutral territory here, hoping for a bargain down the road.