This week we are adding a new name to our Super Stocks list: Tim Hortons (THI, Financial). We began this series last summer with the idea of choosing one leading Canadian company from the key sectors of the economy. Those selected to date are Enbridge (pipelines), CN Rail (transportation), BCE Inc. (telecommunications), TD Bank (financials), and Fortis (utilities). Tim Hortons is the nominee for the consumer discretionary category. Here's the background.
Tim Hortons (THI)
The business: Tim Hortons is the iconic Canadian fast food franchise. Ever since the company opened its first doughnut and coffee shop in Hamilton ON in 1964, it has been a favorite drop-in place for people. Almost all Canadians have been in a Tim Hortons restaurant at least once; many have been there dozens or even hundreds of times. Why? A combination of good coffee, freshly baked doughnuts and cookies, friendly service, low prices and great marketing. It has proven to be an unbeatable formula.
The company was named for NHL hall-of-famer Tim Horton, who was one of the founders. He played for the Toronto Maple Leafs, New York Rangers, and Buffalo Sabres until his death in 1974. The chain operated exclusively in Canada for 20 years, then opened its first U.S. store in Tonawanda, NY (near Buffalo) in 1984. Its coffee bean roasting plant is based in Rochester, NY.
Only old-timers remember that the original stores offered only two products: coffee and doughnuts. But as the years passed, a variety of new items appeared ranging from apple fritters to freshly baked pies. In the 1980s, the company took the big step of tackling the lunch market with such products as chili, soup, bagels, sandwiches, and wraps. This expanded the appeal of the stores and increased revenue dramatically.
In 1995, Tim Hortons was taken over by Wendy's International and a great Canadian name passed into Yankee hands. However, just over a decade later, it was spun-off as a separate company on Sept. 29, 2006 and subsequently moved its head office back to Canada.
Today, Tim Hortons is the fourth-largest publicly traded fast food restaurant chain in North America and the largest in Canada. It operates a total of 3,871 outlets, with 3,225 in Canada and 645 in the U.S., and is in the process of expanding into the Persian Gulf region.
The security: The common shares of Tim Hortons trade on the New York and Toronto stock exchanges under the symbol THI. We originally recommended the company in the IWB in July 2009 at C$28.88, US$25.91.
Why we like it: After a brief hiccup last year when the CEO departed under unusual circumstances, Tim Hortons is back on track and is showing strong growth. The expansion into the U.S. has hit a few rough spots but on the whole it appears to be working well despite fierce competition from several other fast food franchises ranging from Country Style to McDonald's. Third quarter same-store sales were up 6.3% over last year in the U.S., a very good performance especially in difficult economic times. (In Canada the gain was 4.7%.) The U.S. growth is contributing to the company's bottom line with operating income of $2.9 million in the U.S. segment in the third quarter compared to a $17.5 million loss in the same period last year.
The company is actively buying back its shares and had 7.9% fewer fully diluted shares outstanding in the third quarter compared to the same period last year. It still has $64 million available for more buy-backs between now and the expiration of the current program next March.
Financial highlights: As reported last week, Tim Hortons reported third-quarter revenue of $726.9 million compared to $670.5 million in the prior year, an increase of 8.4%. Net income rose 40.4%, to $103.6 million ($0.65 a share, fully diluted) compared to $73.8 million ($0.42 a share) last year. The balance sheet is sound with a very comfortable debt/equity ratio of 0.38 as of the end of the 2010 fiscal year.
Risks: The company is not recession-proof but is close to it. Historically, low-cost fast food operations fare better than most hospitality companies during an economic downturn because they are more affordable to people on limited budgets.
Distribution policy: The stock pays a quarterly dividend of $0.17 a share ($0.68 a year) to yield 1.3% at the current price. We expect a dividend increase in 2012.
Tax implications: For Canadians, shares held in non-registered accounts are eligible for the dividend tax credit. For U.S. investors, dividends qualify for the lowest rate, however there is a 15% withholding tax which can be recovered through the foreign tax credit.
Who it's for: This is a core stock for long-term investors who are interested in capital gains plus modest but growing cash flow. The risk level is moderate.
Action now: Buy below $50. The shares closed on Friday at C$50.88, US$49.89.
Tim Hortons (THI)
The business: Tim Hortons is the iconic Canadian fast food franchise. Ever since the company opened its first doughnut and coffee shop in Hamilton ON in 1964, it has been a favorite drop-in place for people. Almost all Canadians have been in a Tim Hortons restaurant at least once; many have been there dozens or even hundreds of times. Why? A combination of good coffee, freshly baked doughnuts and cookies, friendly service, low prices and great marketing. It has proven to be an unbeatable formula.
The company was named for NHL hall-of-famer Tim Horton, who was one of the founders. He played for the Toronto Maple Leafs, New York Rangers, and Buffalo Sabres until his death in 1974. The chain operated exclusively in Canada for 20 years, then opened its first U.S. store in Tonawanda, NY (near Buffalo) in 1984. Its coffee bean roasting plant is based in Rochester, NY.
Only old-timers remember that the original stores offered only two products: coffee and doughnuts. But as the years passed, a variety of new items appeared ranging from apple fritters to freshly baked pies. In the 1980s, the company took the big step of tackling the lunch market with such products as chili, soup, bagels, sandwiches, and wraps. This expanded the appeal of the stores and increased revenue dramatically.
In 1995, Tim Hortons was taken over by Wendy's International and a great Canadian name passed into Yankee hands. However, just over a decade later, it was spun-off as a separate company on Sept. 29, 2006 and subsequently moved its head office back to Canada.
Today, Tim Hortons is the fourth-largest publicly traded fast food restaurant chain in North America and the largest in Canada. It operates a total of 3,871 outlets, with 3,225 in Canada and 645 in the U.S., and is in the process of expanding into the Persian Gulf region.
The security: The common shares of Tim Hortons trade on the New York and Toronto stock exchanges under the symbol THI. We originally recommended the company in the IWB in July 2009 at C$28.88, US$25.91.
Why we like it: After a brief hiccup last year when the CEO departed under unusual circumstances, Tim Hortons is back on track and is showing strong growth. The expansion into the U.S. has hit a few rough spots but on the whole it appears to be working well despite fierce competition from several other fast food franchises ranging from Country Style to McDonald's. Third quarter same-store sales were up 6.3% over last year in the U.S., a very good performance especially in difficult economic times. (In Canada the gain was 4.7%.) The U.S. growth is contributing to the company's bottom line with operating income of $2.9 million in the U.S. segment in the third quarter compared to a $17.5 million loss in the same period last year.
The company is actively buying back its shares and had 7.9% fewer fully diluted shares outstanding in the third quarter compared to the same period last year. It still has $64 million available for more buy-backs between now and the expiration of the current program next March.
Financial highlights: As reported last week, Tim Hortons reported third-quarter revenue of $726.9 million compared to $670.5 million in the prior year, an increase of 8.4%. Net income rose 40.4%, to $103.6 million ($0.65 a share, fully diluted) compared to $73.8 million ($0.42 a share) last year. The balance sheet is sound with a very comfortable debt/equity ratio of 0.38 as of the end of the 2010 fiscal year.
Risks: The company is not recession-proof but is close to it. Historically, low-cost fast food operations fare better than most hospitality companies during an economic downturn because they are more affordable to people on limited budgets.
Distribution policy: The stock pays a quarterly dividend of $0.17 a share ($0.68 a year) to yield 1.3% at the current price. We expect a dividend increase in 2012.
Tax implications: For Canadians, shares held in non-registered accounts are eligible for the dividend tax credit. For U.S. investors, dividends qualify for the lowest rate, however there is a 15% withholding tax which can be recovered through the foreign tax credit.
Who it's for: This is a core stock for long-term investors who are interested in capital gains plus modest but growing cash flow. The risk level is moderate.
Action now: Buy below $50. The shares closed on Friday at C$50.88, US$49.89.
