The ASX 200 share to buy that just took a 24% dive: expert

Whether it's fried chicken or Mexican food, this business will enjoy a recovery in its margins. It's just that it might come later than previously thought.

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Sometimes businesses have temporary hiccups that scare off investors.

But if you're investing in ASX shares with a long-term horizon, it could be an opportunity to pick up a bargain.

Morgans senior analyst Alexander Mees this week named one particular S&P/ASX 200 Index (ASX: XJO) stock exactly in that position right now:

A young boy points and smiles as he eats fried chicken.

Image source: Getty Images

ASX share now at 40% discount

Fast food franchise operator Collins Foods Ltd (ASX: CKF) watched its share price tumble a hair-raising 24.3% from Tuesday to early trade Wednesday morning.

Mees attributed this to a delay in the previously stated period for margins to recover after this year's supply pressures.

"A 2H23 margin recovery is no longer on the cards," Mees said on the Morgans blog.

"Margin guidance has been reduced for FY23. Collins Foods now expects KFC Australia to be in the range of 15% to 16% compared with previous guidance of 16% to 17%."

The shocking drop in the Collins share price this week meant the stock is now 41.7% lower than where it started the year.

Buy now for the medium-term recovery

Mees, though, still rates Collins shares as a buy. He suspects the market has overreacted this week, with his team finding no surprises in the reported financial metrics.

"Same-store sales growth was +5.1% in KFC Australia and +10.4% in KFC Europe," he said.

"EBITDA was in line with our expectations — in fact, it was slightly better — but we note that our estimates were below consensus."

A cloud does hang over Collins' Mexican venture Taco Bell.

"Taco Bell is at a fork in the road. 1H23 SSS declined by (7.8%)," said Mees.

"In our opinion, the brand is not getting as much traction as expected with consumers." 

The company is, however, taking proactive steps to turn it around.

"Collins says that new Taco Bell builds have been paused so that focus can be put into improving sales efficiency and profitability," Mees said.

"Collins Foods has a new marketing agency and Taco Bell International-employed CMO and will be looking to turn the brand around in 2H23."

The share price is still attractive enough for a long-run investment.

"We maintain an add rating," said Mees.

"We believe the forward multiples are sufficiently low to warrant a consideration of the medium-term recovery in margins."

The people who run Collins Foods certainly think it's ready to charge ahead.

According to The Motley Fool's James Mickleboro, no less than four directors have bought up Collins shares after the stock price slaughter this week.

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Collins Foods. The Motley Fool Australia has recommended Collins Foods. 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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