Charles River Laboratories (CRL) reported fourth-quarter 2014 earnings (excluding special items) of 81 cents per share, easily beating both the Zacks Consensus Estimate of 71 cents and the year-ago quarter figure of 73 cents per share. Earnings benefitted from higher sales and lower tax rate.
Charles River’s net revenue increased 13.9% year over year to $329.5 million in the fourth quarter, surpassing the Zacks Consensus Estimate of $320 million. Foreign currency movements negatively impacted revenues by 2.9% in the quarter.
Fourth Quarter in Detail
We remind investors that in Mar 2014, Charles River had 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 Argenta and BioFocus businesses. The acquisitions were completed in Apr 2014. Located in the UK and Netherlands, both 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.
Moreover, on Oct 29, 2014, Charles River acquired the ion channel testing services provider, ChanTest Corporation, for $52 million in cash along with milestone payments of $2 million.
The acquisitions of Argenta, BioFocus, and ChanTest contributed a total of 9.3% to the top line in the fourth quarter of 2014. Following the acquisitions, Charles River revised its reporting segments to ensure better alignment with the modified business. The company now operates through three segments – Research Models & Services (RMS), Discovery and Safety Assessment (DSA) and Manufacturing Support (Manufacturing).
Revenues from the RMS segment were $117.7 million in the fourth quarter of 2014, down 3.9% from the year-ago quarter.
Revenues from the DSA segment were $149.6 million in the fourth quarter, up 35.4% year over year driven by the Argenta and BioFocus acquisitions. Revenues were also driven by strong demand for the company’s safety assessment service. Sales from mid-tier clients were strong while sales to global key accounts also increased.
Revenues from the Manufacturing segment were $62.3 million, up 10.6% year over year driven by double-digit growth in the Endotoxin and Microbial Detection businesses.
In 2014, Charles River repurchased 2.1 million shares for $110.6 million. The company’s board of directors increased the stock repurchase authorization by $150 million to an aggregate amount of $1.15 billion in Dec 2014. Consequently, the company now has $178.5 million remaining under its share repurchase program.
2014 Results
Revenues soared 11.3% to $1.30 billion in 2014 from $1.17 billion in 2013 and were in line with the Zacks Consensus Estimate. Earnings came in at $3.46 per share, up from $2.93 in 2013 and beat the Zacks Consensus Estimate of $3.36.
2015 Guidance
Charles River now expects revenues to grow 6% – 7.5% driven by better performance at the DSA and Manufacturing segments. The company projects adjusted earnings per share in the range of $3.55 – $3.65. The Zacks Consensus Estimate of $3.58 is well within management’s projected range.
Our Take
We are encouraged by Charles River’s fourth-quarter beat driven by higher revenues on account of the recent acquisitions. We are positive on the company’s annual guidance and expect strong performance in 2015. The company’s ongoing global productivity and efficiency initiatives should further boost the bottom line in 2015 and offset the impact of unfavorable currency movements.
Currently, Charles River carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the broader health care sector include McKesson Corporation (MCK), Biogen Idec (BIIB), and AmerisourceBergen Corporation (ABC). All three carry a Zacks Rank #2 (Buy).
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