By Paul Price of Market Shadows
Americans might not know the name Tim Horton, but hockey-crazed Canadians certainly do. He was a big star on NHL ice before converting his glory from Stanley Cups to coffee cups.
Tim Horton’s (THI), the business, got rolling in 1964, was acquired by U.S.–based Wendy’s (WEN) in 1995 and finally was set free again via a March 2006, IPO. They currently operate about 4,500 total units, about 3,500 located north of the border in Canada. 99% of the stores are franchised making for relatively smooth and predictable, royalty-based cash flow for the parent company.
Results have been excellent. 2013 marked the 22 straight year of higher year-over-year same-store sales in both the USA and Canada. THI’s metrics are among the very best in Value Line’s 1700-company main research universe.
Six of the seven years since the 2006 IPO have seen improved EPS. The Great Recession of 2008 caused just a minor profit dip on the way to renewed growth. Earnings per share more than doubled, from $1.20 to $2.70, from the end of 2006 through 2013.
Dividends shot up from 12-cents per share in 2006 to a newly increased rate of $1.17 per share (in $US @ Feb. 20, 2014 exchange rate) today. At $52.39 that provides an attractive and well-covered current yield of 2.23%.
Market volatility has provided some nice valuation-based entry points over the years for those who weren’t afraid to buy low. Monday’s closing price of $52.34 was down from a fall 2013 peak of $61.46. The forward multiple of just 16.1x is lower than THI’s historical average P/E of 20.4x. It represents the stock's lowest valaution since Tim Horton’s panic sell-off near the end of 2008. Today’s yield surpasses what was available at the three most recent “best buying opportunites”.
Periods of share price underperformance (from 2007 – 2009) and from early 2012 through the present, were the result of share price regression following higher than normal valautions rather than operating difficulties.
A rebound to a normalized 20 P/E on Value Line’s 2014 projection of $3.25 in EPS would support a 1-year, $65 target price. That’s pretty much how Standard & Poors sees things as well. They enigmatically call THI a ‘hold’ while expecting a 12-month goal more than 22% above the Feb. 24 closing quote.
Tim Horton’s is a classic GARP (Growth At a Reasonable Price) stock. It is high-quality, very consistent, decent yielding and carries a better than average safety rating. I bought 100 shares for Market Shadows’ Virtual Value Portfolio this morning @ $52.39.
Market Shadows’ Virtual Put Wrtiing Portfolio also shorted one contract each of the Oct. 18, 2014, $50 and $55 puts at option premiums of $2.25 and $4.80 respectively. The $55 put went off at 10:36 AM, too late for the image below to record it.
We will be forced to buy more THI at prices of $47.75 or $50.20 if exercised, something we’d be fine with should that occur.
Follow all Market Shadows’ closed-out and current equity trades here.
See Market Shadows’ past put writing results and present-day option trades by clicking here.
