Time to buy? One Australian stock that hasn't been this cheap in years

This blue chip is trading close to a record low. Here's why Goldman thinks it could be the time to buy.

| More on:
Close-up of a business man's hand stacking gold coins into piles on a desktop.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Although the market may be trading close to a record high, not all Australian stocks are faring so well.

One of those is Endeavour Group Ltd (ASX: EDV), which could be dirt cheap at current levels.

Why could this Australian stock be a buy?

Endeavour is the owner of the Dan Murphy's and BWS, as well as the ALH Hotels business, which has over 350 licensed venues across the country.

Its shares recently hit a record low of $4.08, which is well short of its 2021 IPO listing price of $6.50 per share. It is fair to say that this makes the Australian stock one of the worst blue-chip IPOs in recently years.

While this is very disappointing for early investors, the team at Goldman Sachs believes the selling has been overdone and created a very attractive buying opportunity.

A recent note out of the investment bank reveals that its analysts have put a buy rating and $5.50 price target on the drinks giant's shares.

Based on its current share price of $4.20, this implies potential upside of 31% for investors over the next 12 months.

In addition, the broker is forecasting a fully franked dividend of 20 cents per share in FY 2025. This represents a 4.75% dividend yield and boosts the total potential 12-month return to almost 36%.

What is the broker saying?

Goldman highlights that there are two main concerns that have been weighing down this Australian stock.

One is that alcohol consumption is in a structural decline. It feels these concerns are overdone. Goldman said:

Market concern over alcohol consumption structural decline overdone: Per Euromonitor, Australia's per cap consumption of alcohol is already one of the highest in the world in both volume/value terms. That said, industry growth has been relatively stable, averaging 10-yr CAGR of ~2.6% from 2009-2019, and pushing higher into 5.8% 2019-2023 CAGR largely due to inflation, which is likely having an impact on volume in FY24. Whilst per cap consumption volume has been on a downtrend (-1.6% 09-19), population growth, positive mix/price have driven industry growth.

It also notes that the liquor category is challenged at present, which is impacting investor sentiment. However, the broker highlights that Endeavour is growing its market share in these challenging times, which bodes well for when the category recovers. It adds:

Market share gains will position the Company well for category recovery: Whilst the Liquor category is currently challenged, we agree with management's focus on market share gain while keeping reasonable level of profitability. Excluding One Endeavour costs, Our FY25e Retail EBIT margins of 6.6%, whilst below FY24 7.0% is still in line with FY19 margin of 6.6%.

All in all, Goldman appears to see this Australian stock as one to buy while it is so cheap. It concludes:

We reiterate Buy on our continued believe in a high quality retailer gaining share amid a category down-cycle with a resilient growth option in Hotels. Company is trading at FY25 P/E of 17x vs historical average of 22x and WOW 22x, COL 21x.

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 positions in and has recommended Coles Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Cheap Shares

Modern accountant woman in a light business suit in modern green office with documents and laptop.
Cheap Shares

Buying AFIC shares? Here's what you actually own

AFIC shares are currently trading well below their value.

Read more »

A woman looking at her watch representing need to buy ASX shares urgently.
Cheap Shares

Is this the last chance to grab these cheap ASX shares at a discount?

These buy-rated shares may not be cheap for long according to analysts.

Read more »

Smiling couple looking at a phone at a bargain opportunity.
Cheap Shares

Where to find the 'cheapest' shares on the ASX

Where should investors look for opportunities right now?

Read more »

A couple sit in their home looking at a phone screen as if discussing a financial matter.
Cheap Shares

2 ASX shares trading below book value

These stocks could be bargains with cheap valuations.

Read more »

A man and a woman sit in front of a laptop looking fascinated and captivated.
Cheap Shares

Can ASX 200 shares be a bargain even after the index hit a new record?

Sometimes it can be good to 'buy high'.

Read more »

Two men laughing while bouncing on bouncy balls
Opinions

Why I think these 2 ASX shares are bargain buys

In the world of quality cyclical shares, what goes down typically will bounce back up again.

Read more »

A balance sheet and calculator for assessing a company or individual's financial position
Cheap Shares

7 beaten-up ASX shares with 'strong balance sheets'

In a sea of green, there are plenty of cheap stocks still out there.

Read more »

Two happy shoppers finding bargains amongst clothes on a store rack
Cheap Shares

2 undervalued ASX shares I'm looking to buy in 2025

I think these stocks have plenty of potential.

Read more »