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Tim Hortons Inc. (THI): Zacks Rank Buy

Todd Bunton

Tim Hortons Inc. (THI) announced a lot of good news for investors on February 23. It (1) reported better than expected fourth quarter results, (2) announced a $200 million stock buyback, and (3) increased its dividend by 24%.

This prompted analysts to revise their estimates higher for both 2012 and 2013. It is a Zacks #2 Rank (Buy) stock.

Company Description

Tim Hortons is a quick-service restaurant company with 4,014 locations, including 3,295 in Canada, 714 in the United States and 5 in the United Arab Emirates.

It is headquartered in Oakville, Ontario, Canada and has a market cap of $8.3 billion.

Fourth Quarter Results

Tim Hortons delivered strong fourth quarter results on February 23. Earnings per share came in at 65 cents, beating the Zacks Consensus Estimate of 61 cents. It was a stellar 25% increase over the same quarter in 2010.

Total revenues surged 21% to $779.8 million, well ahead of the Zacks Consensus Estimate of $726.0 million. This was driven by a solid 5.5% increase in same-store sales in Canada and a 7.2% increase in the U.S.

Adjusted operating income was up 15% year-over-year as the company was able to somewhat offset higher commodity costs with operating leverage.

Estimates Rising

Analysts have revised their earnings estimates significantly higher following Tim Hortons' solid Q4 results. It is a Zacks #2 Rank (Buy) stock.

The Zacks Consensus Estimate for 2012 is now $2.74, representing 14% EPS growth over 2011. The 2013 consensus estimate is currently $3.08, corresponding with 13% growth.

Analysts expect the company's solid same-store sales momentum to continue in the near future. This, along with the company's plans to eventually expand to 4,000 store in Canada, should drive double-digit earnings growth over the foreseeable future.

Returning Value to Shareholders

Management has also made a couple of shareholder-friendly moves lately. It announced on February 23 that it will repurchase up to $200 million worth of shares (representing about 10% of the company's float).

It also announced on that day that it was raising its quarterly dividend by 24% to 21 cents per share. It yields a solid 1.6%.

The company has a target payout ratio of 30-35% of net income, so as long as EPS continues to grow, expect more dividend increases down the road.


Although shares of THI don't look cheap, the valuation picture still looks reasonable. The stock trades at 18.9x 12-month forward earnings, in-line with its historical median. And it sports a PEG ratio of 1.4 based on a consensus 5-year EPS growth ratio of 13.5%.

The Bottom Line

With rising earnings estimates, strong growth projections and shareholder-friendly management, Tim Hortons offers investors a lot to like.

Todd Bunton is the Growth & Income Stock Strategist for Zacks Investment Research and Co-Editor of the Reitmeister Value Investor.

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