Tim Hortons stock looks as good as the food
Dear Mr. Berko:
On our first Canadian visit last month, we were treated to a wonderful bowl of chili, a delightful turkey cheese sandwich, four incredibly tasty doughnuts and several cups of incredible coffee at a 24-hour Tim Hortons sit-down restaurant. I was so impressed with the food and physical plant that I told my wife we should each own 50 shares in our individual retirement accounts. Please tell us what you think.
P.L., Destin, Fla.
Dear P.L.:
Tim Hortons Inc. (THI-$34.18), my favorite Canadian eatery, founded in 1964 by a hockey player of identical DNA, is a classy, upscale version of Dunkin’ Donuts. Tim Horton died in an auto crash a decade later. But his namesake’s ambrosial “good to the last drop” coffee, toothsome doughnuts, savorous baked goods, rich hot chocolate and gustable sandwiches still produce sweet revenue and earning growth.
Hortons knows that its success depends on five important rules in the fast-food business: (1) excellent products; (2) outstanding service; (3) good locations; (4) a clean and attractive establishment; and (5) superior cost controls. These are some of the important reasons that THI has twice as many Canadian outlets (more than 3,000) as McDonald’s. This is also the reason that Tim Hortons accounted for 40 percent of all fast-food revenues in Canada. And this is why Tim Hortons commands 80 percent of the Canadian baked goods market and 66 percent of the Canadian coffee market; Starbucks ranks No. 2 with just 10 percent.
THI has a small presence in the United States with 606 units located in Ohio, New York, Rhode Island, Kentucky, West Virginia, Pennsylvania, Massachusetts and Maine.
If I were 25 years younger, I’d buy a THI franchise for the state of Florida, which, in a couple of years, would lay McDonald’s and Dunkin’ Donuts flat on their derrieres.
Nearly all THI units are owned by franchisees, and there is still abundant opportunity in Canada, where management plans to open 150 or so units per year. Management also wants to increase its presence in the United States, where the brand is not as well known and where near-certain success might take a little longer. Tim Hortons will concentrate its U.S. operations primarily in the Northeast and Midwest and hopes to have about 1,200 American units in the next decade.
THI franchisees provide the parent company with an annuity-like income stream. The firm’s vertically integrated supply chain provides THI with a second revenue source through the distribution of baked goods and specially roasted coffee. This multi-channel operation helps generate an impressive free cash flow.
Tim Hortons has a low debt-to-capital ratio, a $7.21 per share book value and pays a niggardly 48-cent dividend that has increased yearly since initiated at 12 cents in 2006. Revenues are expected to come in at $2.3 billion for 2010 and $2.5 billion in 2011. Earnings this year are expected to be $1.95 per share and $2.22 next year, and there could be a dividend increase to 66 cents.
Meanwhile, the Street’s 12-month price consensus is $39, up about 15 percent from today’s market price.
I can’t imagine a better-tasting selection of baked goods, coffee or sandwiches. And I can’t imagine that there are many conservative, long-term investments as attractive as THI.
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net. ©2010 Creators.com
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