Tim Horton's Timbits
Okay, I admit I'm biased. I own 100 shares of Tim Hortons, which I bought in November when the price dropped to $46. The stock is now trading at $48 and change, so I'm about $200 richer. Cha-ching!
Despite my colleague Darcy Keith's warning that Tim's best days are behind it, I have no plans to sell my shares. If anything, I'll be buying more if the price drops.
Why do I like Tim's? Well, partly it's because Tim's is helping itself to a growing share of my family's disposable income.
Like Mr. Keith, I'm not a huge fan of the coffee. But because the stores are so ubiquitous – and the prices are reasonable – it's become my family's chosen stop on summer road trips. My kids enjoy the frozen lemonade, my wife likes the iced cappuccinos and, if we're stopping there anyway, I will drink the coffee. The clean bathrooms are also a plus.
More important to me as an investor, every Tim's we stop at has something else in common: A lineup. True, the lines are often so long that some customers get fed up and walk away. But this is a nice problem to have and Tim's management is working to contain the "look and leaves" by opening double drive-thrus and making the stores more efficient.
Beyond such anecdotal observations, Tim's is an attractive investment for other reasons:
1) The dividend is growing. Tim's yield of 1.7 per cent isn't huge, but the dividend has grown at an annualized clip of nearly 25 per cent over the past five years. And there's more where that came from, including an estimated increase of close to 20 per cent in February.
2) The bad news is already baked into the price. Tim's shares have plunged about 17 per cent from their peak of nearly $58 last spring, reflecting worries about slowing same-store sales growth and rising competition from McDonald's and others. Sure, there could be more downside for the shares, but a lot of the damage has been done, in my opinion.
3) The P/E is reasonable. The stock is trading at about 16 times estimated 2013 earnings of $3.01 a share. This is a fair multiple for a company with an entrenched market position, strong brand and expected earnings growth of about 12 per cent in both 2012 and 2013.
4) The company is still growing. Skeptics have been saying for years that Tim's is running out of growth opportunities, particularly in Canada. Yet from 2007 through 2011 total revenues rose at an annualized rate of 8.7 per cent and earnings per share grew by 13.2 per cent. With expansion opportunities in Quebec and Western Canada, the chain is aiming to have 4,000 restaurants across the country, up from about 3,400 currently, in addition to 755 in the United States.
5) Same-store sales aren't everything. True, same-store sales growth has slowed, but that's to be expected when a company is opening so many new stores. In my neighbourhood, for example, a new Tim's recently opened a few blocks from my house. The new location will probably draw customers away from other Tim's in the area, but overall revenue should rise.
As an investor looking to buy good companies at reasonable prices, I had no interest in Tim Hortons when it was trading at close to $58. The P/E was out of line at close to 20 and it was clear that expectations were way too high. Now that the stock has tumbled and people are – to borrow the title of Mr. Keith's article – "Falling out of love with Tim Hortons" – this is not a bad time to fall in love as an investor.
READERS: What's better, Tim's coffee, or its stock performance?
John Heinzl