Investors who’ve forgotten what the world was like before the long, slow melt-up might be nervous around charts like Charles River Laboratories Intl. Inc (NYSE:CRL), especially after management pushed the next earnings call back an extra day.

I get it. This is a name that has run over 50% year-to-date — better than 88% of stocks on the market and far ahead of most of its peers in the healthcare sector.

But the fundamentals are telling me that CRL has more room to run.

The company has a commanding and extremely secure position within the pharmaceutical industry, so it’s going to take a drastic decline in drug research to cut into Charles River’s share of the discovery budget.

Remember, this isn’t some upstart lab company, but a linchpin of the global pharma ecosystem, working with all 100 of the world’s top drug makers and contributing to 70% of the programs that made it past the FDA last year.

Market penetration like that doesn’t go away because a partner decides to cut back on innovation.

If anything, as Big Pharma gets hungrier for new drugs at a reasonable cost, bigger contracts get pushed to CRL scientists.

The challenge here, of course, is that while revenue is relatively reliable, significant growth is a factor of management’s ability to deepen existing relationships. The greater a percent of the development process that Charles River can take on, the more money it makes from each of those top 100 customers.

M&A Benefitting the Bottom Line at CRL Stock

That’s where management’s mergers and acquisitions (M&A) activity has focused — new scientific specialties in fresh research areas broaden the platform and consolidate once-widely-fragmented services on one ledger line. We saw this back in August when CRL bought Dutch research lab Brains On-Line, which specializes in discovering molecules that affect the central nervous system.

Odds are good we’ll keep seeing “tuck-in” acquisitions moving the bottom line.

While the stock is a long way from the $76 level it commanded at the end of last year, the multiples have only stretched to 21X forward earnings. I think the growth and stability of the business justifies that premium, and Wall Street thinks it can expand a long way from here. Bearish price targets keep nudging higher as analysts recognize that the models were too conservative.

At least one firm that downgraded CRL after its last quarter back in August has since had to admit defeat and is now leading the charge with a target of $130 on the stock.

I really like CRL, but I recommend waiting for a brief consolidation around $108 before building a position. This way, it only takes a test of recent records to make some money.

— Hillary Kramer

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Source: Investor Place