Tim Hortons Inc. $35 - Toronto symbol THI

TIM HORTONS INC. $35 (Toronto symbol THI; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 188.8 million; Market cap: $6.6 billion; SI Rating: Extra risk) operates 2,733 coffee-and-donut shops in Canada, and 345 in the United States. Franchisees operate 97.5% of its stores. Much of the company’s growth comes from a steady stream of new products, and innovative promotions. Healthier menu items such as fresh sandwiches, soups and salads have also helped it attract customers who avoid donuts. In the three months ended July 1, 2007, earnings fell 11.9% to $67.2 million from $76.3 million a year earlier. Write-offs related to the company’s initial public offering gave it an unusually low tax rate of 19.8% in the year-earlier quarter. The tax rate in the latest quarter grew to a more normal 33.8%. Per-share earnings fell 7.7%, to $0.36 from $0.39, due to fewer shares outstanding. Sales rose 14.4%, to $465.3 million from $406.8 million, partly due to 18 new stores and higher prices. Same-store sales rose 6.5% in Canada, and 3.8% in the U.S. The company has had trouble expanding sales in the U.S., where it faces strong competition from Dunkin Donuts. It still plans to open 60 to 80 new stores in the U.S., mainly in areas near the Canadian border. Tim Hortons is also making progress with new initiatives to cut costs. Despite some initial problems, its plan to deliver dry, refrigerated and frozen products in the same truck should cut its fuel expenses. A new computerized accounting system should also produce long-term savings. The stock trades at 24.1 times the $1.45 a share it will probably earn in 2007. That’s reasonable considering its high market share and long history of rising sales. The $0.28 dividend yields 0.8%. Tim Hortons is a buy.