TIM HORTONS INC. $54 (Toronto symbol THI; Aggressive Growth Portfolio, Consumer sector; Shares outstanding: 153.4 million; Market cap: $8.3 billion; Price-to-sales ratio: 2.6; Dividend yield: 1.9%; TSINetwork Rating: Average; www.timhortons.com) is the largest fast-food company in Canada, with 3,453 outlets that mainly serve coffee and donuts. The company also has 808 U.S. stores.
The stock has moved up lately in response to demands from Highfields Capital Management, a U.S.-based activist investment firm that owns 1.5% of Tim Hortons’ shares. Highfields has proposed several ways to boost shareholder value, including slowing Tim Hortons’ expansion in the U.S., where it faces intense competition from larger chains like McDonald’s, Dunkin’ Donuts and Starbucks.
Many ways to unlock Tim’s value
In addition, Highfields wants Tim Hortons to buy back 40% of its stock, sell or spin off its distribution operations and transfer its real estate holdings to a new real estate investment trust.
Tim Hortons seems unlikely to adopt Highfields’ suggestions. However, similar involvement by activist investors has helped boost value at other firms, such as Agrium and Canadian Pacific Railway.
Meanwhile, Tim Hortons continues to benefit from opening new stores and successful new menu items like panini sandwiches. The company’s sales rose 40.0%, from $2.2 billion in 2008 to $3.1 billion in 2012. Earnings jumped 119.2%, from $284.7 million in 2008 to $624.0 million in 2010. That’s mainly due to a $361.1-million gain on the sale of its stake in a 50/50 bakery joint venture in 2010. It used the cash from the sale to buy back shares, so earnings per share rose at a faster rate of 131.0%, from $1.55 in 2008 to $3.58 in 2010.
Earnings rose 5.2%, from $382.8 million in 2011 to $402.9 million in 2012, while earnings per share rose 10.2%, to $2.59 from $2.35.
Local partners cut overseas risk
Tim Hortons also plans to spur its growth by expanding outside North America. Through a franchise deal with Dubai’s Apparel Group, it has 27 outlets in the United Arab Emirates and Oman. Apparel Group aims to open 100 more stores in the Persian Gulf region over the next five years.
Another growth area is making coffee for single-serve home brewing systems. Tim Hortons already has a deal to sell coffee for the Tassimo system, and it will soon start making coffee for the Mother Parker RealCup format, which is compatible with the popular K-Cup machines.
Tim Hortons’ strong balance sheet will help support its expansion. Its long-term debt of $512.6 million is a low 6% of its market cap. It also holds cash of $74.6 million, or $0.49 a share.
Well-known brand justifies p/e ratio
The stock trades at 18.6 times its likely 2013 earnings of $2.91 a share. That’s a reasonable p/e ratio in light of the company’s iconic brand and high market share. The $1.04 dividend yields 1.9%.
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