Charles River Drops on Near-Term Headwinds From Primate Investigation

Charles River CRL reported strong fourth-quarter results highlighted by revenue of $1.1 billion and full-year revenue of nearly $4 billion, representing a 12% increase compared with 2021′s revenue. The company continues to benefit from strong booking demand and a robust backlog. During the earnings call, management announced that it received a subpoena from the U.S. Department of Justice, or DOJ, on Feb. 17 related to an investigation into the Cambodian nonhuman primate, or NHP, supply chain. In mid-November 2022, the DOJ charged two Cambodian officials and six co-conspirators with felonies related to an NHP smuggling scheme in which wild-caught macaques were laundered through Cambodian entities for export to the United States and elsewhere and were falsely labeled as captive bred, which violates the Endangered Species Act and the Lacey Act. Charles River Laboratories was not named in the DOJ charges in November, and it was subpoenaed to provide information related to the case.

Investors reacted negatively to the news of Charles Rivers Laboratories’ subpoena and sent the stock down roughly 8%. However, we believe this was an overreaction as demand for preclinical testing remains strong and challenges in the NHP supply chain will likely not have a long-term impact on earnings.

We maintain our fair value estimate of $260 per share, and we view the stock as undervalued, currently trading in 4-star territory about 13% below our fair value estimate. We reiterate our narrow moat and stable trend ratings, which are based on the company’s strong competitive advantages and expansive offerings of preclinical services.

While the DOJ’s investigation will cause study delays, we anticipate it will only have a short-term impact on Charles River and the broader preclinical safety assessment space. Management is working closely with the U.S. Fish and Wildlife Service to implement new procedures to ensure that the NHPs imported from Cambodia are purpose-bred for scientific studies.