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On Friday, Goldman Sachs revised its stance on Charles River Laboratories International Inc. (NYSE: CRL), downgrading the stock from Buy to Neutral and lowering the price target to $170 from the previous $190. The change in rating reflects a shift in perspective regarding the company’s Contract Development and Manufacturing Organization (CDMO) business and the current valuation’s reliability in the face of market demand. Currently trading at $165.35, InvestingPro analysis suggests the stock is undervalued, despite trading at a notably high P/E ratio of 828x.
Matthew Sykes, an analyst at Goldman Sachs, explained that the original Buy rating was based on Charles River Labs (NYSE:CRL)’ strong position in the preclinical sector and the potential for growth as biotech funding increased. The $8.46 billion market cap company, which generated $4.05 billion in revenue over the last twelve months, maintained reasonable valuations compared to historical averages. The expectation was that the challenges faced by CRL’s CDMO segment were resolved, potentially contributing to growth and improved margins.
Despite the downgrade, Sykes maintains a positive outlook on Charles River Labs’ competitive edge in the preclinical market. He anticipates the company will benefit significantly once biotech demand picks up again. InvestingPro data reveals two important insights: net income is expected to grow this year, though 8 analysts have revised their earnings downwards for the upcoming period. The company maintains a "GOOD" Financial Health Score of 2.66, supporting Sykes’ view on its longer-term prospects. For deeper insights into CRL’s valuation and growth potential, investors can access the comprehensive Pro Research Report, available exclusively on InvestingPro.
However, Sykes now believes that the CDMO business will no longer be a growth driver for Charles River Labs. Additionally, the valuation is not seen as having a stable foundation in the current demand environment. This reassessment led to the lowered price target and the altered stock rating.
In his commentary, Sykes further outlined additional concerns that informed the decision to adjust the rating to Neutral. While he did not specify these concerns, the downgrade suggests that Goldman Sachs sees a more cautious outlook for Charles River Labs in the near term.
In other recent news, Charles River Laboratories reported its fourth-quarter 2024 earnings, exceeding analysts’ expectations. The company achieved an earnings per share of $2.66, surpassing the forecast of $2.54, and reported revenues of $1 billion, slightly above the anticipated $985.18 million. Despite a challenging year, these results reflect a strong performance in key markets, particularly in North America and Latin America. The company also launched several new products and expanded its operational capabilities. Looking forward, Charles River Laboratories anticipates Q1 2025 revenues to be similar to Q1 2024, with expected acceleration in the second quarter.
In other developments, Jefferies maintained its Hold rating on Charles River Laboratories with a price target of $169. This decision was informed by insights from the Society of Toxicology meeting, where analysts noted increased pricing pressure and a slowdown in demand for the first quarter of 2025 compared to the previous quarter. The analysts also highlighted concerns about budgetary risks from the National Institutes of Health and government sources, which could impact the company’s operations. These factors contributed to Jefferies’ cautious outlook on the stock, despite the company’s recent earnings beat.
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