CRL Misses, Curbs Expectations - Analyst Blog

Charles River Laboratories International Inc.’s (CRL) second quarter 2010 earnings (excluding special items) of 49 cents per share fell short of the Zacks Consensus Estimate of 54 cents. This was approximately 25.8% below the year-ago earnings (excluding special items) of 66 cents. On a reported basis (including special items), the company earned 22 cents per share in the reported quarter as opposed to 52 cents in the year-ago quarter.

The decrease in earnings was attributable to lower sales volume and higher costs related to Charles River’s enterprise resource planning (ERP) initiative. The decline was partially mitigated by the cost cutting initiatives undertaken in 2009 and the first quarter of 2010.

Net sales for the reported quarter declined 5.2% to $292.1 million, well short of the Zacks Consensus Revenue Estimate of $304 million. Segment-wise, sales in the Research Models and Services (RMS) division for the reported quarter climbed marginally (up 0.9%) to $165.7 million. Growth was driven by the acquisitions of Piedmont and Cerebricon coupled with strong sales of In Vitro products. Foreign exchange negatively affected the sales growth rate in the quarter by 1%.

Sales in the Preclinical Services (PCS) segment suffered badly in the reported quarter and declined 12.3% to $125.0 million. The decline was attributable to the low demand for Charles River’s preclinical services from its pharmaceutical and biotechnology clients among other factors. The decline was partially mitigated by the positive effect of foreign currency translation.

Gross profit for the reported quarter stood at $100.4 million as opposed to $114.5 million in the year-ago quarter, down 12.3%. Selling, general and administrative expenses for the reported quarter climbed 17% to $66.1 million.

2010 Outlook Trimmed

The company, which is a leading provider of early development outsourced services, toned down its expectations for 2010, primarily because of the longer-than-expected weakness in demand from its larger clients. Charles River now projects 2010 adjusted earnings in the range of $1.90 - $2.00 per share as opposed to the previous forecast of $2.20 - $2.40 per share. The Zacks Consensus Estimate of $2.00 per share for 2010 is at the upper end of the revised projection.

Net sales are forecasted to drop by 2% to 3%, as against the earlier projection of low single-digit growth.

Our Recommendation

Charles River is a Zacks #4 Rank (Sell) stock, highlighting the near-term pressure on the stock. This is primarily because of the weakness in demand for the company’s services from its large clients. The downward revision of earnings estimates in last 30 days by most of the analysts covering the stock also supports our short-term view on the stock.

We remain Neutral on the stock in the long-term due to the lack of visibility on a turn around in early-stage outsourcing services.
 
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