Tim Hortons Is Winning the Doughnut Wars

Comparing Tim Hortons to some of its better-known competitors, such as Dunkin' Donuts, Starbucks, and McDonald's, it is simply much cheaper and offers greater growth opportunity.

Tim Hortons (THI), the Canada-based coffee and casual fare retail chain, reported stellar earnings this morning, and the shares are popping some 4% to a new 52-week high of $52.80. I think this is just the beginning of what could be a multi-year run. Tim Hortons looks to be the cheapest stock within the “coffee and doughnut” sector, and has incredible growth potential. Today's report moves it to the top of the food chain among the fast food (or almost any food) retailers.

The Quiet Canadian

T-Ho, as it is affectionately known (actually, in Canada it's simply referred to as Tim's), reported that revenues grew 21%, earnings per share increased by 25%, and same-store sales enjoyed a 7.1% increase. And just to show how shareholder-friendly it is, it also boosted the dividend by 23% and announced a $200 million (in loonies) share buyback.

After a year of basically moving sideways between $45 and $50, these numbers seem to have finally caught the eye of the investment community. Comparing Tim Hortons to some of its better-known competitors, such as Dunkin' Donuts (DNKN), Starbucks (SBUX), and McDonald's (MCD), it is simply much cheaper and offers greater growth opportunity.

Let's look at some basic metrics: basic price to earnings (or PE), earnings per share to growth (or EPS), price to earnings growth (or PEG) and number of locations

While the first three companies mentioned are the most direct competitors, I've thrown in Chipotle Mexican Grill (CMG) as good comparison for what kind of valuation and stock price appreciation I think Tim Hortons should be awarded and could experience. Today's bump in the dividend will give it a 1.5% yield. Nothing huge, but equivalent to Starbucks and better than the zero offer by Dunkin' or Chipotle. McDonald's has a solid 2.55% yield.

Beyond the Great White North

Tim Hortons has the overwhelming majority of its restaurants in Canada, some 3,600 stores, and has pretty much saturated its home turf. It equates to having one location for every 10,500 citizens. Compare this to Dunkin' Donuts, which has one US location for every 44,000 citizens, and Starbucks, which has one US location for every 18,000 citizens. While Dunkin' Donuts and Starbucks have made clear their plans for aggressive growth, Tim Hortons has proceeded cautiously, opening just a few hundred shops in the US and a handful overseas in the past few years.

But the expansion, while slow, has been successful as it seems that customer loyalty -- which is near cult-like in Canada -- is translating well. I know here in New York there are four locations that are doing well and have stolen business from the nearby alternatives. A colleague who lives in Dubai tells me that the local Tim Hortons is vastly better than the local Starbucks, and that there are plans to open three more in the coming months. The company only has a few locations in the UK; while it may seem counterintuitive to enter Europe at the moment, Hortons' value and quality proposition would probably succeed quite well in a frugal, low-key-spending environment.

After today's pop I might give it a few days before adding it to your portfolio, but I believe Tim Hortons will deliver piping-hot and sweet returns over the next few years.

What Would Homer Simpson Do?

Remember the days when Krispy Kreme (KKD) was a high-flying growth stock much like Chipotle is today? Then it started to look more like the next Boston Chicken (also once owned by McDonald's), but managed to avoid the fate of bankruptcy. Well, it's had a minor resurgence of late, gaining some 20% to $7.30 over the past three sessions.

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