Why Tims' stale stock could be a sweet deal

If business is so good, why is the stock being left behind?

The Globe and Mail
December 10, 2009

Why Tims' stale stock could be a sweet deal
Sales, earnings and dividends are up. Why aren't investors nibbling?
John Heinzl


People still line up for their daily Tim Hortons fix. But lately, you don't see anyone queuing up to buy the stock.

Nearly four years after the much-hyped initial public offering of Canada's beloved doughnut chain, something strange has happened: In the middle of a raging stock market rally, Tims' shares have gone staler than a day-old Dutchie.

They finished yesterday at $30.30, 8 per cent below the closing price of $33.10 on March 24, 2006, the day of Tims' IPO. For investors who like buying great companies at attractive prices, Tims is a sweet deal, some analysts say.

Even as its shares have lost ground, Tims' revenue and profits have marched steadily higher. Its same-store sales, a key measure that strips out the effect of new store openings, have posted solid gains while other fast-food chains have struggled to hang on to customers.

"Tim Hortons remains a solid long-term growth story," Desjardins Securities analyst Keith Howlett said in a recent note. It is a "prolific generator of free cash" and is "posting the best same-store sales growth of North American restaurants."

If business is so good, why is the stock being left behind?

One factor is the nature of the rally. Investors are flocking to risky assets, leaving so-called defensive plays such as Tims in the dust. There are also concerns that in a few years the chain may near the saturation point in Canada, while the jury is still out on whether its U.S. operations - which only recently broke into the black on an operating basis - will gain sufficient traction, which is seen as critical to the company's long-term growth.

"The way in which the stock is being valued now is that you're not really paying anything for the U.S. business," said Dave Jiles, Canadian equity analyst with Vancouver-based Leith Wheeler Investment Counsel, which owns Tim Hortons shares. "Success in the U.S. would translate into, I think, significant upside for the stock price. I think most investors realize that."

Tims trades at a multiple of 15.3 times estimated 2010 earnings, which is reasonable for a company whose profits are projected to grow at double-digit rates for at least the next few years and which enjoys a wide competitive "moat" in Canada by virtue of its strong brand name, loyal customers and ubiquitous stores.

What's more, the company has conservative debt levels and throws off ample free cash, allowing it to finance expansion and return money to shareholders via stock buybacks and dividends.

Even as other companies are cutting or holding their dividends steady, Tims announced an 11-per-cent increase in February and is expected to hike its dividend again in the new year, according to Bloomberg estimates. (The company's policy is to pay out 20 to 25 per cent of the previous year's earnings as dividends.) As for concerns that Tims may be running out of room to grow in Canada, the company says it still has plenty of expansion potential. With nearly 3,000 outlets in Canada, it aims to open another 1,000 units, president and chief executive officer Don Schroeder told a conference sponsored by Morgan Stanley last month in New York.

"We still have significant growth opportunities in the province of Quebec, where we believe we can double the size of our chain," he said. "We also continue to have growth opportunities in western Canada, which was the last area of Canada for us to develop. Finally, we still have good growth opportunities in a lot of the large urban markets, including Vancouver and Toronto."

The company is also exploring growth options abroad, having planted the Tim Hortons flag in about 300 convenience stores in Ireland and Britain. In North America, it has teamed up with the Cold Stone Creamery, securing the Canadian rights to the ice cream brand, which it is selling in about a dozen Canadian stores and 65 co-branded U.S. sites.

Longer term, however, the company's success may well hinge on the performance of the Tim Hortons brand south of the border, where it operates 560 stores, largely in the U.S. northeast. Although the U.S. operations are moving in the right direction, it will be a battle, analysts say.

"While we believe Tim Hortons is a high-quality restaurant concept, the U.S. is a highly competitive market with many entrenched players such as McDonald's, Panera Bread, Dunkin' Donuts, Wendy's, Burger King and Sonic, which we believe will make Tim Hortons' expansion more challenging," Brian Yarbrough, an analyst with Edward Jones in St. Louis, said in a research note.

Mr. Yarbrough rates the stock a "hold," but some analysts are more bullish. National Bank Financial's Jim Durran rates Tims "outperform" with a price target of $36.

Tims "is an extremely high-quality name with dominant Canadian market share, a low capital-intensive U.S. expansion strategy, a rock-solid balance sheet, excellent cash-flow generation, solid unit growth and [Cold Stone Creamery] growth opportunities," he said in a note.

The company has a "terrific business model," added Leith Wheeler's Mr. Jiles. Notwithstanding questions about the U.S., "for long-term, income-oriented investors, this is an attractive stock to own."



1. Josh Taylor 12/10/2009 6:37:35 AM
Canadian equities suck because our fund managers have to hold so many Canadian stocks that they bid them up. This same stock in the US would be at least 15% discounted.

This stock growth is flat and dividends are poor. Not great EPS or P/E in this market.

The reason we think this is a sweet buy is more a statement on the lack of choice in Canadian equity markets rather than a good stock.

2. LedZepplin 12/10/2009 7:45:45 AM
"One factor is the nature of the rally. Investors are flocking to risky assets, leaving so-called defensive plays such as Tims in the dust. There are also concerns that in a few years the chain may near the saturation point in Canada, while the jury is still out on whether its U.S. operations - which only recently broke into the black on an operating basis - will gain sufficient traction, which is seen as critical to the company's long-term growth."

John Heinzl, you just answered your own question about why investors aren't buying Tim's stocks.

From your description, Tim's doesn't look that defensive. In fact, you just said its US strategy is far from certain. Why buy a stock that has so much exposure to the US? Haven't we learnt the cost yet of over-exposure to the US economy? If Tim's management can come up with a China strategy, we might just get interested. I'm surprised you didn't ask that question at all.

3. Debbs 12/10/2009 8:14:34 AM
Wow! How many donuts is Timmy giving you to write this relentlessly glowing article?

4. Srr126 12/10/2009 8:44:27 AM
While I love Tims - I would never buy the stock.
Same store sales are essentially FLAT not growing (after price increases).
As mentioned - growth in the USA is questionable - the list of Canadian companies (including Tims) who have failed is long and distinguished.
Net Income is essentially flat for past 3 years.
Cash flow and EPS is flat to declining. Virtually no insider purchasing activity.
Most challenging of all - their business model is based on selling an undifferentiated product with huge but potentially unsustainable mark-ups.

5. lolwut 12/10/2009 8:56:45 AM
LOL at the article mentioning higher dividends when its projected to increase to a whopping 11c per share. No company that doesn't have a shareholder orientation and share price growth as its core strategy should be bought. Period. Tim's looks like just another company where managers are building a pharoanic empire in order to justify management bonuses. When you can buy blue chips with 4 and 5% dividend yields (with payout ratios of around 50% of EPS), there's no need to be picking over a penny dividend stock. Something like yellow pages will pay you 5 times PER MONTH what Tim's pays in a year.

6. kazazajua 12/10/2009 8:59:50 AM
Tim's goods, like their stock ,is stale the minute they go on sale all over Canada after being cooked 3 days earlier in Toronto. I hear that next year, to further increase profits, the're moving the ovens to Mexico.

7. dirtyduck 12/10/2009 10:12:23 AM
While we believe Tim Hortons is a high-quality restaurant concept

Unfortunately, the same can't be said for it's product. Chintzy portions, of precooked donut fat, which may be clobbered when Canada forces restaurants to post their food, and nutrition, content.

8. zerokarma 12/10/2009 11:07:45 AM
Like already mentioned if dividend yields were closer to the 4-5% range you may find more people willing to give the stock a shot but when there are already so many better alternatives out there why would you bother with a stock that has been consistently stale for a few years now.

9. rustyblades 12/10/2009 11:52:51 AM
Before you consider buying some stock in Tim's try this simple test. Buy an apple fritter at Tim's. Eat it if you want but one bite should suffice. Next buy an aplle fritter at Country Style. If you're lucky it may even be warm. Try to eat only one bite.

The lunch's at Tim's are good but the donuts are not. They have never been the same ever since they went to central baking and shipping half cooked lumps of dough to th eoutlets.

Also what dividend, I had to check twice. The way the article read I thought the .11 was per quarter.

I'll pass.

10. missippi 12/10/2009 12:09:04 PM
tin hortons—fast junky foods,eat a sensable meal at a good place,and at most the same price.

11. JPdOrleans 12/10/2009 12:49:56 PM
"If business is so good, why is the stock being left behind?"

It's just good, not spectacular, P/E is kind of high and the dividend payout ratio and yields too low. Also not a spectacular balance sheet.

12. venture philantrhopist 12/10/2009 8:40:07 PM
Expand to China? That's ridiculous, what does Tim's know about the Asian consumer? Besides, Asians don't seem to have the sweet tooth of westerners. Compare THI to yellow pages? That's absurd; completely different business and YLO stock chart speaks for itself. Chase huge dividends and you'll get burned. Why would I look at Tim's when there's no real barriers to entry, no distinctive competitive advantage, and margins which could be easily eroded with food inflation or competition, when I can look at SC.to, which is executing it's plan incredibly, with improving SSS in a weak economy? Now that's a high quality retailer, which also plays on the demographics.

13. Let me tell You How it is 12/11/2009 3:10:36 AM
Check out Krispy Kreme stock history if you want to know where Tims is going


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