TIM HORTONS INC. (Toronto symbol THI; 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.
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.
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 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.
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Canadian stocks: Franchise deal with Apparel Group to expand with 100 more stores in Persian Gulf
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.
The stock trades at 18.6 times its likely 2013 earnings of $2.91 a share. The $1.04 dividend yields 1.9%.
In the latest edition of The Successful Investor, we look at whether Tim Hortons is likely to adopt Highfields’suggestions. We also examine Tim Hortons’ financial outlook and whether it can continue to support its ambitious expansion plans. We conclude with our clear buy-sell-hold advice on the stock.
(Note: If you are a current subscriber to The Successful Investor, please click here to view Pat’s recommendation in the latest issue. Be sure to log in first.)
COMMENTS PLEASE—Share your investment knowledge and opinions with fellow TSINetwork.ca members
U.S. activist investment firms, or hedge funds, have pushed several Canadian companies, like CP Rail, into actions that have thus far had a positive result. Do you think the actions of activist investors are bound to be generally beneficial for shareholders, or do you feel less comfortable with U.S. investors putting pressure on Canadian firms? Let us know what you think.
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Dave
Activist investors push changes in corporate board and executive behaviour that can be healthy if corporate strategy was unimaginative or too conservative. Shareholders usually seem to benefit and the more efficiencies that can be achieved all the better for marketplace and capital efficiency.
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Activist investors push changes in corporate board and executive behaviour that can be healthy if corporate strategy was unimaginative or too conservative. Shareholders usually seem to benefit and the more efficiencies that can be achieved all the better for marketplace and capital efficiency.