Tim Hortons Inc. $32 - New York symbol THI

TIM HORTONS INC. $32 (New York symbol THI; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 189.7 million; Market cap: $6.1 billion; WSSF Rating: Extra risk) operates over 2,700 coffee-and-donut shops in Canada, and 340 in the United States. Franchisees operate 97% of its stores. The company was a wholly owned subsidiary of Wendy’s International Inc. up until April 2006. That’s when it sold shares to the public at $23.162 each. In October, Wendy’s handed out its remaining Tim Hortons stock as a tax-deferred dividend. Investors received 1.3542759 shares for every Wendy’s share held. Few Americans have heard of Tim Hortons, but it has become a national icon in Canada. It recently surpassed McDonald’s as Canada’s largest fast-food chain in terms of stores and sales. Much of the company’s growth comes from a steady stream of new products and innovative promotions. Recent moves to add submarine-style sandwiches, soups, salads and a hot breakfast sandwich have also cut its reliance on donuts. In the first quarter of 2007, earnings fell 6.8%, to $59.3 million from $63.6 million a year earlier (all amounts except share price and market cap in Canadian dollars), due to a change in its tax situation. The company had an unusually low tax rate of 14.8% a year earlier, due to write-offs associated with its initial public offering, compared with a more normal rate of 34.6% in the latest quarter. Per-share earnings fell 20.5%, to $0.31 from $0.39, due to more shares outstanding. Sales rose 13.9%, to $424.6 million from $372.8 million. Same-store sales rose 6.3% in Canada, and 4.0% in the U.S. The company has had trouble duplicating its success in the U.S. While its stores near the Canadian border are strong performers, its 40 stores in New England face strong competition from more-established chains such as Dunkin Donuts. Tim Hortons may soon close these outlets if they continue to lose money. That would add roughly $0.07 a share to its annual income. The stock has gained 38% since its initial public offering, and now trades at 20.9 times the $1.47 a share (Canadian) that it will probably earn this year. That’s reasonable in light of its leading market position in Canada, and strong growth record. The $0.28 (Canadian) dividend yields 0.9%. Tim Hortons is a buy.