The ASX 200 share that just got upgraded to buy amid the market carnage

A broker has lifted its rating on Endeavour Group shares to ‘outperform’.

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Key points

  • The ASX 200 has officially crashed into correction territory but there’s one share that’s avoided the meltdown
  • The Endeavour Group share price held firm after Macquarie upgraded it to “outperform”
  • The broker believes the ASX 200 share is worth buying despite the macroeconomic risks due to its defensive earnings and development opportunities for its hotel business

The market meltdown that wiped more than $100 billion in shareholder value on Tuesday didn’t stop one ASX 200 share from getting a “buy” upgrade.

The S&P/ASX 200 Index (ASX: XJO) crashed 3.55% on Tuesday, taking its fall from its August 2021 high to nearly 13%.

That means our key benchmark is now in correction territory. This is defined as a drop of between 10% and 20% from the peak.

Why this ASX 200 share is holding firm

But amid the gloom that’s been triggered by rapid interest rate hikes and runaway inflation, broker Macquarie upgraded the Endeavour Group Ltd (ASX: EDV) share price.

This may explain why the hotel operator and alcoholic drinks retailer outperformed the market today.

The Endeavour Group share price ended flat at $7.15, which is an admirable feat given most ASX 200 shares closed in the red.

Positive earnings outlook

There are a few reasons behind Macquarie’s decision to lift its rating on the shares to “outperform”. For one, the group’s earnings are more defensive than discretionary retailers, several of which got downgraded by the broker.

Another reason is Endeavour Group’s ability to generate a decent return on invested capital (ROIC). Macquarie explains:

We believe that the [approximate] $300m capex [capital expenditure] spend targeting 15% ROIC, amortising to 10% ROIC by year five, will drive 3.9% EBIT growth annually.

We think the retail and hotels businesses act as natural hedges against each other and should minimise the impact of an economic downturn.

Defensive income and margin expansion

Further, the growth in private label brands is driving the group’s expanded earnings before interest and tax (EBIT) margin. This positive trend is likely to continue, according to Macquarie.

The broker also pointed out that its pokies business has proven to be relatively resilient during times of economic uncertainty. Gambling isn’t an easy habit to kick.

Another thing that is helping the ASX 200 share is the trend for consumers to spend more on services than goods. Households initially spent big buying furniture and electronics as we emerged from the pandemic, but they are now preferring to spend on experiences instead.

What is the Endeavour Group share price worth?

However, it’s not all good news for the Endeavour Group share price. Regulatory risks remain a concern as there’s always scrutiny on liquor and gaming. Any potential reform could hurt profits.

Macquarie’s 12-month price target on the shares is $7.70 a share, and the forecast FY22 dividend yield stands at around 2.8%.

Motley Fool contributor Brendon Lau has positions in Macquarie Group Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Macquarie Group Limited. 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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