Upslope Capital: Charles River Labs ($CRL) Investment Case
In their Q4 2024 investor letter, Upslope Capital introduces Charles River Labs ($CRL) as a new investment, positioning it as a cyclical compounder currently experiencing a cyclical downturn. The firm presents CRL as an attractive opportunity despite recent market challenges and soft 2025 guidance, highlighting the company’s strong market position and long-term potential.
Business Overview
- Leading pharmaceutical services provider specializing in drug discovery support, safety testing, research models, and outsourced manufacturing
- Dominant market share with involvement in ~80% of all drugs approved in the past five years
- Revenue primarily from biotech (40%) and pharma (30%) customers
- Geographic presence: North America (70%) and Europe (25%)
Market Position
- Industry leader with significant competitive advantages
- Strong history of growth and margin expansion
- Currently near cyclical trough after post-COVID slowdown
- Well-positioned in markets requiring high trust and regulatory compliance
Performance Analysis
- Financial Metrics:
- Revenue and FCF/share up 50% and 30% respectively over past five years
- Current FCF generation of ~$450 million annually
- Reduced leverage from 3.5x to 2.5x net debt
- Operating margins flat for past four years
- Growth Opportunities:
- Potential beneficiary of drug manufacturing reshoring (BIOSECURE Act)
- AI-driven productivity improvements in drug development
- M&A potential and increased buyback capabilities
Market Dynamics and Opportunities
- Currently trading at similar levels to five years ago despite significant business growth
- Positioned to benefit from recovery in pharma budgets
- Sticky customer relationships due to regulatory considerations
- Strong potential for margin expansion as growth reignites
Valuation
- Trading at 12x NTM EBITDA (historical range: 10-14x)
- 18x EPS (historical range: 15-20x)
- 3x sales (historical range: 2.5-3.5x)
- Attractive valuation considering near-trough conditions and growth potential
Risks
- Extended pressure on pharma budgets
- Biotech funding environment challenges
- Supply chain risks
- Political sensitivity due to business model
- Interest rate sensitivity due to leverage
- Early biotech funding exposure
Other Key Points
- Recent disappointing 2025 guidance
- Strong history of rebounding from sluggish periods
- Potential for increased capital return to shareholders
- Largest share repurchase in a decade executed in 2024
Upslope Capital views Charles River Labs as an attractive investment opportunity, citing its market leadership, potential for recovery, and reasonable valuation as key factors. They believe the company is well-positioned to benefit from both cyclical recovery and long-term industry trends despite current market challenges.
Click here for the full investor letter.
Disclaimer: The information provided in this blog post is for informational and educational purposes only and does not constitute financial, investment, or other professional advice. The content is based on a third-party investor letter and does not represent an endorsement, recommendation, or solicitation to buy or sell any particular security or investment product mentioned.
Investing involves risk, including the potential loss of principal. Past performance is not indicative
Disclaimer: Third party content is provided for informational purposes only and should not be construed as an offer to sell or a solicitation of an offer to buy or sell any security. Third party content is not intended to serve as a recommendation to buy or sell any security and is not intended to serve as investment advice. Third party content creators are not affiliated with BBAE Holdings LLC, (“BBAE”) Redbridge Securities LLC (“Redbridge Securities”) or BBAE Advisors LLC (“BBAE Advisors”). All investments involve risk, including the possibility of total loss of principal. For additional important information, please click here.
