TIM HORTONS INC. $34 (Toronto symbol THI; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 176.2 million; Market cap: $6.0 billion; Price-to-sales ratio: 2.7; Dividend yield: 1.5%; SI Rating: Average) is one of Canada’s largest fast-food restaurant chains. Its 3,015 outlets mainly serve coffee and donuts. The company also has 563 stores in the U.S.
Franchisees operate 99.5% of Tim Hortons’ coffee-and-donut shops. The company gets about two-thirds of its revenue from supplying these outlets with coffee, baked goods and related items. (Rents and franchise fees account for the remaining third of its revenue.) Tim Hortons owns its own bakeries and warehouses. That gives it strong quality control, and lets it use its buying power to negotiate better ingredient costs.
In 2009, Tim Hortons’ earnings rose 4.1%, to $296.4 million from $284.7 million in 2008. However, its 2008 earnings were depressed by a $15.4-million (after tax) charge for non-recurring costs, including writedowns.
The company spent $113.4 million on share buybacks in 2009. Because this left it with fewer shares outstanding, earnings per share rose 5.8%, to $1.64 from $1.55. Tim Hortons plans to spend $200 million on buybacks this year.
The company’s 2009 revenue rose 9.7%, to $2.2 billion from $2.0 billion. That’s mainly because because it opened 176 new outlets: 131 in Canada and 45 in the U.S. On a same-store basis, sales rose 2.9% in Canada and 3.2% in the U.S.
Tim Hortons has several plans to spur its long-term growth, including opening 1,000 new stores, mainly in in Quebec and western Canada. It will build 600 of these new stores over the next four years. It also plans to open 300 new U.S. stores in the next four years, mostly in areas near its existing stores in New York, Ohio and Michigan.
The company is also expanding its alliance with the U.S.-based Cold Stone Creamery chain of ice-cream parlours. Under the terms of the deal, the two companies sell some of each other’s products in their stores. Tim Hortons now has 69 co-branded outlets in the U.S., and it is also selling Cold Stone’s ice cream in 13 of its Canadian stores.
Tim Hortons’ 2010 earnings should rise to $1.98 a share. The stock trades at a reasonable 17.2 times that estimate.
Tim Hortons is a buy.
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