TIM HORTONS INC. $35 (Toronto symbol THI; Aggressive Growth Portfolio, Consumer sector; SI Rating: Extra risk) operates 2,600 stores in Canada that sell coffee, donuts and other foods. The company also has roughly 300 outlets in the United States. Franchisees operate 96.5% of its stores.

The company was a wholly owned subsidiary of Wendy’s International Inc. until March 2006. That’s when it completed an initial public offering of common shares at $27.00 each. In September 2006, Wendy’s handed out its remaining 82.75% stake in Tim Hortons to its own shareholders as a taxdeferred special dividend.

Tim Hortons’ revenue grew from $926.1 million in 2001 to $1.5 billion in 2005, or 12.8% compounded annually. Profits grew from $0.83 a share (total $132.2 million) in 2001 to $1.28 a share ($205.1 million) in 2004. A $53.1 million pre-tax writedown of goodwill cut profit in 2005 to $1.19 a share ($191.1 million).

Biggest fast-food chain in Canada

The company recently supplanted McDonald’s as Canada’s largest fast-food chain, in terms of stores and sales. It now has over 60% of Canada’s coffee market, and 75% of the baked goods market.

A big part of Tim Hortons success is its ability to introduce innovative new products. A good example is its iced cappuccino drink, which helped increase summertime sales. It has also added submarine-style sandwiches and soups to attract more customers.

The company plans to fuel long-term growth through expansion. While it operates in all 10 Canadian provinces, most of its stores are in Ontario and Atlantic Canada. It aims to eventually operate between 3,500 and 4,000 outlets in Canada, mainly through expansion in Quebec and Western Canada.

Tim Hortons is also increasing its presence in urban areas with non-traditional outlets, including mini-stores inside gas stations, movie theatres, schools and hospitals. Many of these new outlets have 24-hour drive-through windows, which should spur repeat visits.

Strong competition hurts U.S. growth

The company has had a tougher time expanding sales in the U.S., where it faces strong competition from market leader Dunkin’ Donuts. Still, it plans to add 200 outlets in the U.S. in the next three years, mainly in regions near the Canadian border.

Unlike many spin-offs, Tim Hortons has an attractive balance sheet. Its long-term debt of $393.0 million is a reasonable 38.5% of shareholders’ equity. Intangible assets account for less than 1% of total assets, and the company has $185.6 million ($0.96 a share) in cash.

High p/e still reasonable

Tim Hortons will probably earn $1.38 a share in 2006, and the stock trades at 25.4 times that estimate. It also trades at a high 4.1 times its sales of $8.50 a share. But Tim Hortons’ strong growth record, market position and well-known brands justify the price. The $0.28 dividend yields 0.8%.

Tim Hortons is a buy.