The battered Downer EDI Limited (ASX: DOW) share price could find some reprieve after Morgan Stanley reiterated its buy call on the ASX 200 share.
The engineering group shed around 4% of its value over the past two days after it posted a disappointing half year result.
The group's interim earnings and revenue slid backwards and missed Morgan Stanley's expectations.
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Is this underperforming ASX 200 share a buying opportunity?
But that wasn't enough to put the broker off as it believes the Downer share price has the potential to outperform from here.
There are a few reasons behind Morgan Stanley's faith in the S&P/ASX 200 Index (ASX: XJO) share. Firstly, a number of one-off factors, such as issues caused by COVID-19, appear to have contributed to the earnings miss. These shouldn't be a drag going forward.
Some areas of growth despite COVID headwind
The broker was also reassured after Downer's Transport division delivered earnings growth of 16% in 1HFY22 compared to the same period last year despite bad weather. If not for this, management was confident that growth would have been significantly higher.
The performance of Downer's Hospitality division was another sore point for shareholders as it recorded a $12 million loss. But at least management indicated that the loss will be minor in the current half. The turnaround is due to Downer's successful exit of the problematic MCG contract.
Potentially better second half for the ASX 200 share
Investors can also find comfort in the fact that Downer usually delivers a stronger second half set of numbers.
Morgan Stanley pointed out that the gap between the first and second half may be even bigger this year due to Omicron.
In any case, the share price of this ASX 200 share is trading on an undemanding valuation and the group has a strong balance sheet.
How much is the Downer share price worth?
"It is focused on government-backed sectors that have a solid outlook," said Morgan Stanley.
"Earnings stability remains an important attribute and something the company needs to demonstrate to justify higher multiples."
It's easy to overlook these strong points following the poor first half outcome. There's also no guarantee that the COVID headwinds will abate in the current half. The lack of management guidance won't help with confidence either.
Nonetheless, Morgan Stanley kept its overweight recommendation on the shares. But it lowered its 12 month price target on the Downer share price by $0.20 to $6.70 a share.
