Buy this sold-off ASX 200 stock for big returns after 'market over-reaction'

The broker thinks that a buying opportunity has been created.

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Endeavour Group Ltd (ASX: EDV) shares started the week with a disappointing decline.

In response to the drinks giant's full year results, the ASX 200 stock ended the session almost 7% lower at $5.15.

While this is disappointing, one leading broker believes that the selloff was an overreaction and has created a buying opportunity for investors. Goldman Sachs said:

Market over-reaction despite solid management against challenging industry; reiterate Buy on attractive valuation.

What is the broker saying about this ASX 200 stock?

According to a note out of Goldman Sachs, its analysts were relatively pleased with the results. They commented:

EDV reported 2H24/FY24 results in-line with GSe on both Group sales and EBIT. The stock traded weaker through the day on 1) weaker 7 week trading and 2) higher lease expenses. Reflecting the results, our FY25/26e EBIT and NPAT is cut by -1.9%/-2.7% and – 4.0%/-4.4% on lower Retail EBIT margins and higher interest expense. Our sales forecasts are largely unchanged given improving sales trajectory. Our updated FY25 EBIT/EPS growth is +1.6%/1.2% YoY (52 vs 53wk growth), improving to FY26/27e EBIT growth of 5.0%/6.5% respectively.

What else?

Goldman also highlights three items from the results that it thinks investors should view positively. The first is its market share gains in the retail market. It notes:

Management noted market share gains in FY24 led by Dan Murphy's strong price leadership. FY24 GPM gained +60bps to 24.4% with combination of mix improvement and productivity. Excluding On Endeavour costs, operating margins expanded 20bps to 7.0% which forms credible base for FY27 onwards.

It was also pleased to see that the ASX 200 stock's Hotels gaming performance is stabilising. The broker adds:

FY24 vs FY23 gaming revenue +2.1% YoY (flat adjusting for 52 week) while non-gaming revenues continued to increase in share driving Hotel GPM expansion of 70bps to 84.8%.

Finally, while there are significant costs for its One Endeavour technology investment, Goldman notes that this will be offset from productivity gains. It adds:

Despite the company carrying double tech costs, this is not normal state and will begin to reduce from FY27. EDV has found ~A$290mn+ productivity (Endeavour Go) to largely offset GSe A$200mn+ of One Endeavour costs FY23-FY26e.

Potential for big returns

In response to the results, Goldman has reiterated its buy rating with a slightly trimmed price target of $6.20 (from $6.30). Based on where this ASX 200 stock currently trades, this implies potential upside of just over 20% for investors over the next 12 months.

And with Goldman forecasting a fully franked 4.3% dividend yield in FY 2025, this boosts the total potential return to almost 25%.

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Motley Fool contributor James Mickleboro has positions in Endeavour Group. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Goldman Sachs Group. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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