A Coffee Play You Shouldn't Ignore

By Jon Quast - August 28, 2012 | Tickers: CBOU, GMCR, KRFT, SBUX, THI | 0 Comments

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Can you imagine a world without coffee?  Or perhaps it would be better to ask: Can you imagine our present day world without coffee?  It's often noted that in the 80's people thought that the age of computers and robots would lead to more work done by machines and less by people, therefore leaving an obscene amount of leisure time on humanity's hands.  What has happened is exactly the opposite.  It seems that for the more productive we become as a race, the even more productive we strive to become someday, and therefore the less leisure time that we actually have.  And that's what you call ironic.

Our present day hectic lifestyles perhaps could exist without coffee, but we all agree: Coffee makes life better.  It should come as no surprise that the busier we humans get, the more coffee we consume.  It would have been awesome to get in on growth stories like Starbucks (NASDAQ: SBUX) in the 90s, or Green Mountain Coffee Roasters (NASDAQ: GMCR) just five years ago.  While both Starbucks and GMCR are still potential investing options, I would like to introduce you to Tim Horton's (NYSE: THI) and show you why this might be the next growth story in the coffee industry.

Tim Hortons: A Canadian Powerhouse

Tim Horton's is an undeniable powerhouse to be reckoned with in Canada.  I say powerhouse because Tim Horton's claims 80% of the coffee market in Canada.  Tim's also claims that 40% of their Canadian customers frequent their establishment at least four times a week.  If that's not enough, same store sales are still increasing at a modest pace.  

While Tim Horton's is very established already in Canada, they still see an opportunity to continue expanding north of the border.  They already have 3,200 restaurants in Canada, and would like to see that number grow to 4,000.  They are targeting some of the western territories where they don't have quite as big of a presence as they enjoy in the eastern territories.  

International Growth: The United States

It's not often we get to talk about the United States being the location of international growth, but today we do.  Tim Horton's is only currently open for business in 10 of the 50 states.  Of the 4,000 Tim Horton's locations, around 700 are in the US.  It may surprise those of you who aren't familiar with Tim, but that is more locations than competitor Caribou Coffee (NASDAQ: CBOU).  Caribou, although an American outfit and perhaps better known on a national level, only has 581 locations.  

700 is a good number of locations, and growth is still happening.  Last year they opened 72 new restaurants.  This year they are shooting for 80-100.  You can compare that to competitor Caribou who is hoping to open 20 company-owned locations this year total.

While 700 restaurants is nothing to be ashamed of, they still don't have a brand, as stated above, that is widely known.  They are a household name in places like Buffalo NY and Cleveland Ohio, but outside of that area not so much.  As they seek to expand into the rest of the country, what are they planning to do to raise brand awareness?  In the latest quarterly report, management cited a partnership arrangement between Tims and Kraft (NASDAQ: KRFT).  Kraft is one of those companies getting in on the single-cup coffee market that was once a near monopoly for Green Mountain.  Where Green Mountain's machine was called the Keurig, Kraft's machine is called the Tassimo and allows you to brew single cups of coffee with devices called "T-Discs."  Tim Horton's will soon have their very own T-Disc (hopefully by the Christmas season) in hopes of gaining some brand recognition as they continue expanding.

International Growth: The Middle East?

Tim Horton's is established in Canada, and is gaining momentum is the USA.  But what of the rest of the international plan?  While competitor Starbucks is targeting markets like China and India, Horton's management is leaving North America for the first time and going to the Middle East.  Just in case you're curious, they are planning on expanding into five countries:  The United Arab Emirates, Kuwait, Bahrain, Qatar, and Oman.  Wow.

The first Tim Horton's is already up and running in the UAE.  But how big could this middle east project be for Tim Horton's?  They are expecting to open up 120 restaurants in the next five years.  I think you'll agree that this is a pretty ambitious goal, and if executed could be an amazing opportunity to see profits grow.  But do people over there really drink coffee?  Well, Starbucks already operates 94 shops in the Emirates and 67 in Kuwait, so the short answer would be...yes.  

The Value

This is a very good company with impressive growth.  They might not be the best and fastest growing company in the world, but I think we can sum up Tim Horton's in a word: healthy.  Without a doubt, we as investors want in on a healthy company over a "sick" company.  But let's get down to the nitty gritty: What kind of value investing opportunity does Tim Horton's offer in comparison to competitors? 

As you can see from the chart, I think that Tim Horton's is priced very fairly in comparison to it's competitors.  Starbucks has a higher ratio, but then again Starbucks is growing faster.  This P/E ratio of 20 is a very reasonable one for a healthy company like Tims that is growing the way it is.  But one more thing you may want to look at is the dividend yield that Tim Horton's offers.

Tim Horton's has raised their dividend every year since they started their dividend five years ago.  Last year they increased the dividend by 24%.  Currently the dividend yield sits at 1.67%.  Starbucks' dividend yield is currently 1.4%, which is virtually the same.  Neither Caribou nor Green Mountain even have a dividend.

So in the end Tim Horton's is your chance to get in on Canada's biggest coffee joint.  They have a cult-like following up north.  They are solidly growing in the USA.  They have a deal with Kraft.  They are branching out to the Middle East.  The P/E ratio is acceptable and the dividend is as good as anybody.  All these factors combined lead me to the belief that Tim Horton did more than just make his hockey team better; he'll make your portfolio better too.

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