Would Ben Graham Have Added Charles River Laboratories International (CRL) To His Portfolio?

Based on the factors that Benjamin Graham considered in analyzing potential stock picks, Charles River Laboratories International is not a quality investment. Only investors with a high risk tolerance and a solid investment thesis on the stock will be interested in this large-cap Biotechnology company.

Charles River Laboratories International Is Probably Overvalued

Graham devised the below equation to give investors a quick way of determining whether a stock is trading at a fair multiple of its earnings and its assets:

√(22.5 * 6 year average earnings per share (6.08) * 6 year average book value per share (63.428) = $112.14

At today's price of $198.06 per share, Charles River Laboratories International is now trading 76.6% above the maximum price that Graham would have wanted to pay for the stock.

Even though the stock does not trade at an attractive multiple, it might still meet some of the other criteria for quality stocks that Graham listed in Chapter 14 of The Intelligent Investor.

Impressive Growth, but Inconsistent Profitability and no Dividend

Charles River Laboratories International’s average sales revenue over the last 6 years has been $3.78 Billion, so by Graham’s standards the company is large enough to warrant an investment. When published in 1972, Graham’s threshold was $100 million in average sales, which would be the equivalent of around a half million dollars today. Needless to say, this is the least important of Graham's requirements, and may be overlooked by all but the most conservative investors.

More importantly, Ben Graham believed that a margin of safety could be obtained by investing in companies with consistently positive retained earnings. Charles River Laboratories International had negative retained earnings in 2011, 2012, and 2013 with an average of $126.73 Million over this period. So the company is not accumulating enough cash over time by Graham's standards.

Graham also required a 30% or more cumulative growth rate of the company's earnings per share over the last ten years.To determine Charles River Laboratories International's EPS growth over time, we will average out its EPS for 2008, 2009, and 2010, which were $-7.80, $1.74, and $-5.38 respectively. This gives us an average of $-3.81 for the period of 2008 to 2010. Next, we compare this value with the average EPS reported in 2020, 2021, and 2022, which were $2.81, $7.60, and $9.48, for an average of $6.63. Now we see that Charles River Laboratories International's EPS growth was 274.02% during this period, which satisfies Ben Graham's requirement.

We have no record of Charles River Laboratories International offering a regular dividend.

Negative Current Asset to Liabilities Balance and an Average Current Ratio

Graham sought companies with extremely low debt levels compared to their assets. For one, he expected their current ratio to be over 2 and their long term debt to net current asset ratio to be near, or ideally under, under 1. Charles River Laboratories International fails on both counts with a current ratio of 1.3 and a debt to net current asset ratio of -0.9.

According to Graham's analysis, Charles River Laboratories International is likely a company of low quality, which is trading far above its fair price.

2018-02-13 2019-02-13 2020-02-11 2021-02-17 2022-02-16 2023-02-22
Revenue (MM) $1,858 $2,266 $2,621 $2,924 $3,540 $3,976
Gross Margins 38.0% 37.0% 37.0% 37.0% 38.0% 37.0%
Operating Margins 15% 15% 13% 15% 17% 16%
Net Margins 7.0% 10.0% 10.0% 12.0% 11.0% 12.0%
Net Income (MM) $123 $226 $252 $364 $391 $486
Net Interest Expense (MM) -$29 -$63 -$59 -$86 -$73 -$59
Depreciation & Amort. (MM) -$131 -$162 -$198 -$235 -$266 -$304
Earnings Per Share $2.54 $4.62 $5.07 $7.2 $7.58 $9.48
EPS Growth n/a 81.89% 9.74% 42.01% 5.28% 25.07%
Diluted Shares (MM) 49 49 50 51 52 51
Free Cash Flow (MM) $401 $581 $621 $713 $990 $944
Capital Expenditures (MM) -$82 -$140 -$141 -$167 -$229 -$325
Net Current Assets (MM) -$1,039 -$1,620 -$2,005 -$2,146 -$3,158 -$3,140
Long Term Debt (MM) $1,114 $1,637 $1,850 $1,930 $2,664 $2,708
The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.