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Tim Hortons Just Keeps Scoring Goals

Posted: Mar 03, 2010 06:49 AM by Greg Sushinsky

Tickers in this Article: BKC, KKD, SBUX, THI, WEN

Canada rules hockey, as its gold medal Olympic team so dramatically proved in Vancouver, but it also has a lot of good companies, too. If you read Will Ashworth's excellent Investopedia article, "Own A Piece Of Canada," it gave investors plenty of ideas for investing in Canadian stocks. One company mentioned in the article, Tim Hortons (NYSE: THI), is a favorite of ours.

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Earnings Report Met With Concern
Tim Hortons, with its assortment of fast-food meals, great coffee and incomparable donuts, recently reported fourth-quarter and fiscal-year earnings. Revenues and income were up across the board for both quarterly and yearly figures, yet the report received a mixed reception. Two areas of concern were voiced by critics. One, the slow growth in its U.S. stores, and two, the related concern that in the near future, the company will likely have saturated the Canadian market. The investment community was looking for visibility by the company on its long-term growth strategy - something it was due to provide in a follow-up investor conference. These two problems must be thoroughly addressed if the company wishes to continue its growth.

Doing Well In A Tough Business
Things are not easy in the fast-food business. The recession and its overhang have provided a difficult climate for companies to make headway. Companies are trying to find a way to improve margins and boost sales. Burger King (NYSE: BKC) is raising the price of its $1 double-cheeseburger to $1.19 and will sell a double hamburger with only one slice of cheese. Burger King also plans to team up with Starbucks (Nasdaq: SBUX) to sell its Seattle's Best brand coffee by September. Meanwhile, Wendy's/Arby's (NYSE: WEN) was looking forward to a mildly profitable quarterly report compared with last year's same-quarter losses.

On the donut front, Krispy Kreme Doughnuts (NYSE: KKD), which is still trying to right itself and overcome years of bad management, is showing hope on the domestic side and is even expanding all the way to Japan. No matter what the results by these companies, all of them are showing the pressure of a continuing hard competitive environment and a squeezed economy.

Tim Hortons' Numbers
Given this harsh competitive environment, the fast-food restaurant context suggests that Tim Hortons' earnings are more impressive than its critics are willing to admit. Revenues rose from $563.7 million to $615.3 million for the quarter. Net income was $91 million, compared to $69 million on a year-over-year basis. Diluted EPS was 51 cents, up from 38 cents in last year's same quarter.

Revenue increases were 9.2%, while diluted EPS was up 32.9%. For the full year, revenues were also up 9.7%, though diluted EPS was up a more modest 5.8%. Same-store sales for the full year in Canada rose 2.9%, below the target range of 3-5%. For the quarter, same-store sales increased 3.4% in Canada and 2.1% in the U.S. The dividend was hiked to 13 cents, and the company announced it would seek to have the dividend payout to the order of 30% to 35% of net earnings.

The Stock
This company is a great brand, an iconic one. It carries the name of its founder, fittingly a hockey star. The earnings report was not fully appreciated by the investment community. Tim Hortons is executing very well, especially given this recession. It should do better in the U.S. when the economy turns and things loosen up for fast-food restaurants. The stock is richly priced, trading near its 52-week high because, despite the noise, long-term investors understand what a solid company and a good investment this stock is. (In theory, PPP stands up much better than it does in reality. Find out how to evaluate currencies according to the price of a Big Mac. To learn more, refer to Hamburger Economics: The Big Mac Index.)

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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 Sushinsky's literary work, see http://writing.gregsushinsky.com/.

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