Barclays Cuts Charles River Labs, Sees Lack Of Demand Proof Over Long-Term

In a report published Friday, Barclays analyst Douglas D. Tsao downgraded the rating on

from Equal Weight to Underweight, while maintaining the price target at $60. The analyst believes that the current stock valuation has greater downside risk than upside potential. "CRL has enjoyed a strong run based on the rebound in demand for preclinical services, although we continue to see secular challenges to in vivo testing creating greater risk for the DSA and RMS businesses than the market generally discounts," analyst Tsao stated. The analyst expressed concern regarding the company's organic earnings growth capabilities, despite the continuing R&D productivity. Although Charles River's management has expressed commitment to protecting margins while bringing Shrewsbury back online, the analyst believes that any meaningful upside to numbers would be limited at this time. "Also, we expect other preclinical players to also add capacity which will at a minimum push out pricing power and could reintroduce unfavorable competitive dynamics," analyst Tsao elaborated, while expressing concern regarding demand remaining strong over the next two to three years. "While we've seen some stability for CRL's RMS business in the US, we don't see a catalyst for meaningful volume growth. Higher outsourcing penetration can support some growth for toxicology but we believe penetration rates are fairly mature," the Barclays report added.