TIM HORTONS INC. $29 (Toronto symbol THI; Aggressive Growth Portfolio, Consumer sector; SI rating: Extra risk) has 2,900 coffee and donut stores in Canada and the United States. Franchisees own 97% of these outlets.

On March 24, 2006, Tim Hortons sold stock to the public at $27.00 each in an initial offering. That cut parent Wendy’s International Inc.’s interest, from 100% to 82.75%. Wendy’s plans to hand out its remaining Tim Hortons shares to its own shareholders by the end of this year.

In the three months ended April 2, 2006, Tim Hortons earned $0.39 a share (total $63.6 million), up 30.0% from $0.30 a share ($47.5 million) a year earlier. Most of that gain came from non-recurring tax rulings that cut its tax bill by $10.1 million. Revenue rose 15.2%, to $372.8 million from $323.6 million, thanks to successful new menu items and 27 new stores. Same-store sales rose 8.7% in Canada, and 9.8% in the U.S.

The company plans to open around 150 new stores in Canada this year, which would give it 2,750 stores here. It also plans to add 50 stores to the 300 it now operates in the U.S. It aims to expand to 4,000 U.S. stores in the next few years.

Deals to build non-traditional outlets in gas stations and sports arenas also give Tim Hortons an easy way to expand sales in its core markets.

It plans to spend around $200 million ($1.25 a share) in 2006 on capital upgrades, including $74 million for a new distribution warehouse in Guelph, Ontario. Relocating to this new facility will increase Tim Hortons’ costs in 2006. But it will eventually cut its distribution costs and improve efficiency.

Tim Hortons should generate over $2.00 a share in cash flow this year, so it can comfortably afford these outlays.

The company used most of the $903.8 million from the public offering to pay down debt it owed to Wendy’s. Tim Hortons long-term debt is now a reasonable 0.4 times equity. A strong balance sheet gives it plenty of flexibility to fund its expansion plans and develop new products.

The stock got as high as $38 just after it began trading, but fell steadily as the initial euphoria wore off. It now trades at 24.8 times its likely 2006 profit of $1.17 a share.

That’s high, but acceptable in light of Tim Hortons’ strong growth record, well-known brands and leading market share. The company aims to pay 20% of its earnings as dividends, payable quarterly. That implies an annual rate of about $0.25, and a yield of 0.9%.

Tim Hortons is a buy for long-term gains.