Charles River Beats on Q2 Earnings & Revenues, Outlook Upped

Charles River Laboratories CRL reported second quarter 2014 earnings (excluding special items) of 97 cents per share, easily beating the Zacks Consensus Estimate of 82 cents and up from 73 cents in the year-ago quarter.

Charles River's net revenues increased 16.5% year over year to $341.2 million in the second quarter, surpassing the Zacks Consensus Estimate of $327 million. Foreign currency movements positively impacted revenues by 1.4% in the second quarter of 2014.

Quarter in Detail

We remind investors that in Mar 2014, Charles River entered into a definitive agreement to acquire the contract research organization (CRO) services division of Galapagos NV.

The CRO division of Galapagos NV includes the businesses of Argenta and BioFocus. The acquisitions were completed in Apr 2014. Located in the U.K. and the Netherlands, both these businesses specialize in integrated drug discovery services from target discovery through the delivery of clinic-ready candidates to a broad range of pharmaceutical and biotechnology companies.

The acquisitions of Argenta and BioFocus contributed 8% to the top line in the second quarter of 2014. Following the acquisitions, Charles River revised its reporting segments to ensure better alignment with the modified business. Charles River now operates through three segments -- Research Models & Services (RMS), Discovery and Safety Assessment (DSA), and Manufacturing Support (Manufacturing). 

Revenues from the RMS segment were $133.1 million in the second quarter of 2014, up 2.6% from the year-ago quarter.

Revenues from the DSA segment were $142.6 million in the second quarter, up 32.7% year over year driven by the acquisition of Argenta and BioFocus. The growth in revenues was also driven by strong demand for the company's safety assessment services from mid-tier clients.

Revenues for the Manufacturing segment were $65.4 million, up 17.5% year over year. The growth in revenues was driven by broad-based growth across all businesses, including the Endotoxin and Microbial Detection, and Biologics Testing Solutions businesses.

During the second quarter of 2014, Charles River repurchased 1.5 million shares for $80.5 million, subsequent to which the company has $48.8 million remaining under its $1.0 billion repurchase program.

2014 Guidance Upped

Charles River upped its earnings guidance for 2014 based on a strong second-quarter performance along with gain from limited partnership investments. The company now expects adjusted earnings per share between $3.25 and $3.35, up from the earlier estimate of $3.15–$3.25. The current Zacks Consensus Estimate of $3.20 per share falls short of the company's increased guidance range.

Charles River reiterated that it expects sales growth of 9%–11% in 2014.

Our Take

We are encouraged by the positive second quarter results driven by higher revenues and operating margin improvement. The company will continue to focus on its sales efforts for mid-tier clients.

The second consecutive increase in guidance was encouraging as well. Hence, we expect a strong performance from the company in 2014.

Currently, Charles River carries a Zacks Rank #4 (Sell). Stocks that currently look attractive in the broader healthcare sector include Allergan AGN, AstraZeneca PLC AZN, and McKesson Corp. MCK. While Allergan sports a Zacks Rank #1 (Strong Buy), the other two are Zacks Rank #2 (Buy) stocks.