Charles River Getting Back on Course

This column was originally published on RealMoney on Dec. 15 at 3:06 p.m. EST. It's being republished as a bonus for TheStreet.com readers. For more information about subscribing to RealMoney, please click here.

Charles River Labs (CRL Quote) surprised the Street last night by raising its 2007 revenue forecast to between 9% and 12%, compared with the 8% consensus forecast. This represents an uptick from recent trends and should help improve investor confidence in the company's near-term fortunes. After what can only be described as an up-and-down year, the company's shares appear due for a rebound following the better-than-expected guidance.

The company also affirmed its earnings outlook for this year and provided initial guidance for 2007. Next year's pro forma earnings are expected to rise 13% to 15% to a range of $2.43 to $2.53 per share; this is likely to provide some upside to the current $2.47 consensus number.

Charles River management was expected to provide a relatively cautious forecast for 2007 after disappointing investors on several occasions over the past year. Importantly, these guidance upgrades do not signal a dramatic change in underlying business trends, as they are largely due to accounting- and acquisition-related factors. Specifically, the earnings lift is due to a 3-cent-per-share accounting change related to the reclassification of ongoing amortization expenses.

Similarly, a large part of next year's upgrade to top-line forecasts is due to the lift from the recently acquired Northwest Kinetics business and a minor currency benefit. I'm encouraged because these new forecasts will directly address market sentiment, which has been sliding in its expectations for 2007. Management's confidence and clarification of the '07 outlook is likely to help repair sentiment toward the stock in the near term.

Many investors had been avoiding the stock in anticipation of another earnings or guidance disappointment. The company is undergoing a big capacity expansion of its clinical research facilities in the first half of next year, which is expected to dampen overall margins.

The cost of this expansion and uncertain pace of new business ramp-ups does provide some uncertainty in the first half of next year. This added preclinical capacity will help meet current market demand and improves the company's growth profile going forward. Although execution risk and early margin trends will remain key focal points for investors, I believe the worst is over in terms of market sentiment toward the stock.

< Previous

1 2

Next >