Taking Stock- Tim Hortons

   Dear Mr. Berko: On our first Canadian visit last month, we were treated to a wonderful bowl of chili, a delightful turkey cheese sandwich, four incredibly tasty doughnuts and several cups of incredible coffee at a 24-hour Tim Hortons sit-down restaurant. I was so impressed with the food and physical plant that I told my wife we should each own 50 shares in our IRA. Please tell us what you think.
-P.L., Destin, Fla.

   Dear P.L.: Tim Hortons (THI -- $33.22), my favorite Canadian eatery, founded in 1964 by a hockey player of identical DNA, is a classy, upscale version of Dunkin' Donuts. Tim Horton died in an auto crash a decade later. But his namesake's ambrosial "good to the last drop coffee," toothsome doughnuts, savorous baked goods, rich hot chocolate and gustable sandwiches are responsible for Hortons' sweet revenue and earning growth. And proof of this pudding is that Canadians have more doughnut shops per capita than any country in the world and are still one of the healthiest populations on the planet.
Hortons knows that their success depends on five important rules in the fast-food business: (1) excellent product, (2) outstanding service, (3) good locations, (4) a clean and attractive establishment and (5) superior cost controls. These are some of the important reasons that THI has twice as many Canadian outlets (more than 3,000) as McDonald's. This is also the reason that Tim Hortons accounted for 40 percent of all fast-food revenues in Canada. And this is why Tim Hortons commands 80 percent of the Canadian baked goods market and 66 percent of the Canadian coffee market, while Starbucks ranks No. 2 with just 10 percent of the Canadian coffee market.
   THI has a small presence in the U.S. with 606 units located in Ohio, New York, Rhode Island, Kentucky, West Virginia, Pennsylvania, Massachusetts and Maine. And THI has a blockbuster unit at Madison Square Garden where Horton played hockey for the Rangers between 1969 and 1971. Meanwhile, I'm told that two tourists who sampled a Tim Hortons menu offering in Ontario were so enthusiastic that they bought a franchise in Ohio. And if I were 25 years younger, I'd buy a THI franchise for the state of Florida, which, in a couple of years, would lay McDonald's and Dunkin' Donuts flat on their derrieres. Gourmet flavor at everyday prices and the most awesome Timbits you ever tasted.
   Nearly all THI units are owned by franchisees, and there is still abundant opportunity in Canada, where management plans to open 150 or so units per year. Management also wants to increase its presence in the U.S., where the brand is not as well known and where near-certain success might take a little longer. THI will concentrate its U.S. operations primarily in the Northeast and Midwest and hopes to have about 1,200 U.S. units in the next decade.
   THI franchisees provide the parent company with an annuity-like income stream. The firm's vertically integrated supply chain provides THI a second revenue source through the distribution of baked goods and specially roasted coffee. This multi-channel operation helps generate an impressive free cash flow and ROI in the high teens.
   Tim Hortons has a low debt-to-capital ratio, a $7.21 book value and pays a niggardly 57-cent dividend that has increased yearly since initiated at 12 cents in 2006. Revenues for 2010 are expected to come in at $2.3 billion and $2.5 billion in 2011. Earnings this year are expected at $1.95 and $2.22 next year, and a possible dividend increase to 66 cents. Meanwhile, the Street's 12-month price consensus is $39, up about 20 percent from today's market price.
   I can't imagine a better-tasting selection of baked goods, coffee or sandwiches. And I can't imagine that there are many conservative, long-term investments as attractive as THI.

   Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, FL 33429 or e-mail him at mjberko@yahoo.com. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com. COPYRIGHT 2008 CREATORS SYNDICATE, INC.

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