3 Reasons to Avoid CRL and 1 Stock to Buy Instead

The past six months have been a windfall for Charles River Laboratories’s shareholders. The company’s stock price has jumped 60.1%, hitting $170.64 per share. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

Is there a buying opportunity in Charles River Laboratories, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free for active Edge members.

Why Is Charles River Laboratories Not Exciting?

We’re happy investors have made money, but we're sitting this one out for now. Here are three reasons you should be careful with CRL and a 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 1.6% 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. Projected Revenue Growth Shows Limited Upside

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect Charles River Laboratories’s revenue to stall. Although this projection suggests its newer products and services will fuel better top-line performance, it is still below the sector average.

3. New Investments Fail to Bear Fruit as ROIC Declines

A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Charles River Laboratories’s ROIC has decreased over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

Final Judgment

Charles River Laboratories’s business quality ultimately falls short of our standards. Following the recent rally, the stock trades at 16.9× forward P/E (or $170.64 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're pretty confident there are superior stocks to buy right now. We’d recommend looking at a dominant Aerospace business that has perfected its M&A strategy.

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