TIM HORTONS INC. $52 (New York symbol THI; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 155.8 million; Market cap: $8.1 billion; Price-to-sales ratio: 2.8; Dividend yield: 1.3%; TSINetwork Rating: Average; www.timhortons.com) operates 3,315 coffee-and-donut stores in Canada, 721 in the U.S. and six in the Middle East. Franchisees operate 99.4% of these outlets.
The company continues to expand its menu. For example, it now sells ice cream in 135 of its stores in Canada and 93 in the U.S., thanks to an agreement with U.S.-based Cold Stone Creamery. Tim Hortons outlets get most of their traffic in the morning, so selling ice cream helps attract more customers in the afternoon and evening.
The company is also introducing its own new products, like soups and panini sandwiches. That’s helping it compete with larger chains. Tim Hortons now feels it can overtake McDonald’s as Canada’s leading seller of fast-food lunches in the next five years.
In the three months ended April 1, 2012, Tim Hortons earned $88.8 million (all amounts except share price and market cap in Canadian dollars). That’s up 10.0% from $80.7 million a year earlier. The company spent $86.4 million on share buybacks during the quarter. Due to fewer shares outstanding, earnings per share rose 16.7%, to $0.56 from $0.48.
Sales rose 12.1%, to $721.3 million from $643.5 million. The company opened 22 new stores in Canada and seven in the U.S. during the quarter. Same-store sales (which exclude contributions from the new outlets) rose 8.5% in the U.S. and 5.2% in Canada.
Tim Hortons plans to open up to 120 stores in the Persian Gulf region in the next few years. It will also start offering free wireless Internet access in 2,000 of its Canadian stores. Free Wi-Fi should prompt visitors to stay longer and buy more food.
The company’s strong balance sheet will easily support these initiatives: Tim Hortons’long-term debt of $351.6 million is a low 4% of its market cap. It holds cash of $143.6 million, or $0.92 a share.
The stock is up 8% since the start of the year. It now trades at 18.8 times the company’s projected 2012 earnings of $2.72 a share. That’s an acceptable p/e ratio in light of the company’s strong growth prospects and high market share in Canada.
Tim Hortons has raised its dividend five times since it became a public company in March 2006. The current annual rate of $0.84 a share yields 1.6%.
Tim Hortons is a buy.
