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Tim Hortons: Focus On The Donut, Not The Hole

Posted: Nov 02, 2009 10:39 AM by Greg Sushinsky

Tickers in this Article: PNRA, MCD, SBUX, KKD, THI

Tim Hortons Inc. (NYSE:THI), the Canadian-based restaurant chain known for its coffee and donuts, had a drop in its net income in its third quarter recently reported. The Street seemed to focus on this news, despite the fact that the loss was largely due to restructuring. What was largely ignored was that the company continued to move ahead despite the recession.

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Donuts and Holes
Tim Hortons earned $56.6 million (all numbers in U.S. dollars) compared with $72.9 million for last year's third quarter, or 31.4 cents versus 40 cents last year, on revenues that increased by 10.7% to $521.20. The impact of reorganization costs as a Canadian public company was $21.4 million, so the EPS without the charge would have been 47 cents. Additionally, the company experienced higher commodity costs and costs of sales due to new products flowing through the supply chain. Same store sales were up over 4% in the U.S. and 3% in Canada. Even with a somewhat "sluggish" fourth-quarter outlook, it still sees a 6-8% growth in operating income for 2009. Investors might want to look at the bright earnings news as the donut, with the restructuring cost and cautionary outlook as the holes.

Coffee, Donuts and Other Stuff to Eat and Profit From
There are plenty of dollars in donuts and whatever goes with them. Krispy Kreme Doughnuts (NYSE:KKD), a Tim Hortons competitor, seems to be righting itself after the fallout from numerous problems years ago. After creating a great product, the company did just about everything else wrong. Now, it has a better handle on its finances and business approach, and is quietly expanding worldwide, including into Asia.

As for coffee, iconic brand Starbucks (Nasdaq:SBUX) is nearly synonymous with the word. As such, it is intensifying its efforts to woo occasional customers to become more permanent, while fast-food giant McDonald's (NYSE:MCD) has become a force in any area it concentrates on, so consider the push it gave its coffee trade with the McCafé as a permanent, solid entry. Consider, too, Panera Bread (Nasdaq:PNRA); although it's not known for its coffee, its baked goods, soups and sandwiches cover a similar business to Tim Hortons, and Panera's recent upswing may bode well for these kinds of specialty eateries.

Coffee, Donuts and Dough
With the operating income and the growing revenue of Tim Hortons, as well as the thriving coffee-and-donut space in which it operates, it's not hard to be bullish on coffee, donuts, and the dough these doughy confections rake in. While it's always good to strongly scrutinize any company's earnings and prospects - after all, that's what investing is about - it seems that Tim Hortons is suffering from a more severe outlook than it deserves. The company's revenues and earnings are growing, despite the temporary charges and the cautious outlook, and the prospects for growth beyond the recession are excellent. Tim Hortons has great food, an iconic brand, loyal customers and is well managed. The stock is nearly fully priced right now, but it is below its five-year average and has room to grow long term. This may not be a spectacular growth vehicle, but it will continue to be a steady gainer for the foreseeable future. You just have to focus on the donut, not the hole. (To learn more, read Sinking Your Teeth Into Restaurant Stocks.)

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By Greg Sushinsky

Greg Sushinsky is a passionate independent investor, who has done his own research, analysis and investing for 20 years. One of his earliest investing memories was when he first saved and bought U.S. Savings Bonds with his own money as a small child. From there, he studied investing on his own and made small stock purchases as he grew as an investor.

Sushinsky still follows the markets, studies and reads widely in financial literature, and has written over 75 articles on investing. He is also a professional editor, whose work is published extensively in large-circulation magazines, digests and across the internet. In other pursuits, Sushinsky writes fiction and has a university degree in philosophy. To see more of Sushinky's literary work, see http://writing.gregsushinsky.com/.

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