What a fantastic six months it’s been for Charles River Laboratories. Shares of the company have skyrocketed 79.5%, hitting $272.74. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is now the time to buy Charles River Laboratories, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Charles River Laboratories Will Underperform?
Despite the momentum, we’re passing on Charles River Laboratories for now. Here are three reasons we avoid CRL, plus one stock we’d rather own.
1. Core Business Falling Behind as Demand Declines
We can better understand Drug Development Inputs & Services companies by analyzing their organic revenue. This metric gives visibility into Charles River Laboratories’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.
Over the last two years, Charles River Laboratories’s organic revenue averaged 1.5% year-on-year declines. This performance was underwhelming and implies it may need to improve its products, pricing, or go-to-market strategy. It also suggests Charles River Laboratories might have to lean into acquisitions to grow, which isn’t ideal because M&A can be expensive and risky (integrations often disrupt focus). 
2. EPS Growth Has Stalled
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
Charles River Laboratories’s flat EPS over the last five years was below its 4.1% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.
3. New Investments Fail to Bear Fruit as ROIC Declines
We like to invest in businesses with high returns, but the trend in a company’s ROIC can also be an early indicator of future business quality.
Over the last few years, Charles River Laboratories’s ROIC has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
Final Judgment
Charles River Laboratories doesn’t pass our quality test. After the recent rally, the stock trades at 22.2× forward P/E (or $272.74 per share). At this valuation, there’s a lot of good news priced in - we think other companies feature superior fundamentals at the moment. Let us point you toward the most dominant software business in the world.
Stocks We Like More Than Charles River Laboratories
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