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Why Charles River Laboratories International Shares Dropped 16.7% This Week

By Jim Halley – Nov 4, 2021 at 11:43PM

Key Points

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The company's stock dropped nearly $75 a share over the course of the week, rattling investors.

What happened

Shares of Charles River Laboratories International (CRL -1.37%) saw its shares plummet 16.7% this week. The stock, which closed last Friday at $448.68, dropped to as low as $373.79 by Thursday. It has been as low as $224.06 and as high as $460.21 the past 52 weeks. Charles River, despite its recent slump, is still up 51% for the year.

Scientists working in a laboratory.

Image source: Getty Images.

So what

Charles River specializes in preclinical and clinical laboratory services and says that it had a hand in 80% of the Food and Drug Administration's new approved drugs over the past three years.

It reported third-quarter earnings on Wednesday, and the results apparently underwhelmed investors. The company posted a strong quarter of revenue of $895.9 million, up 20.5% year over year. The other numbers in the report were less impressive, though. Diluted earnings per share in the third quarter were $2.01, down 1% year over year. Net income was $103.4 million, up just 0.5% over the same quarter in 2020.

Another thing in the report that may have concerned investors was that Charles River downgraded its fourth-quarter guidance, trimming annual revenue estimates by almost $20 million and reducing non-GAAP EPS by less than $0.10, citing the impact of foreign exchange and reduced revenue after the company divested its RMS operations in Japan and its CDMO site in Sweden in October.

CRL PE Ratio Chart

CRL PE Ratio data by YCharts

Now what

This is still a healthcare company that is in a successful niche, as a leading contract research organization (CRO). CROs are becoming increasingly sought out by pharmaceutical companies, especially in the early stages of drug development as CROs specialize in data research, project management, and running clinical trials.

Over the past five years, Charles River has grown revenue by 94.68% and diluted EPS by 140.2%, making it a good long-term purchase.

It's also gotten expensive, however, so while it remains a great company, perhaps it's not a great investment at its current price. It has a price-to-earnings ratio of 48.93 and a price-to-sales ratio of 5.928, both of which make the stock seem a bit pricey if you compare those numbers to those of rivals ICON or IQVIA Holdings. However, Charles River has better earnings before income and taxes (EBIT) margins than either of those two companies, and for the past three years it has increased its EBIT margin by 20.12%.

Jim Halley has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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