Tim Hortons: Stealthily Ahead of Industry Trends

If you like to search for hidden winners, then Tim Hortons might fit the bill.

Mar 12, 2014 at 9:42AM

Tim Hortons

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The quick-service restaurant wars have intensified. With a hesitant and demanding consumer, quick-service restaurants must deliver in every area in order to survive, let alone thrive. Even the largest quick-service restaurant chain in the world, McDonald's (NYSE:MCD), is struggling to attract as many customers as it did in the past. Coffee is a big driver for many quick-service restaurant chains, and McDonald's isn't as in-line with industry trends as it was in the past due to the rise of the health-conscious consumer, which opens the door for Tim Hortons (NYSE:THI), Dunkin' Brands (NASDAQ:DNKN), and Starbucks (NASDAQ:SBUX).

McDonald's serves coffee at its McCafe, which it expects to be a key growth driver going forward, and it's looking to simplify its menu and potentially expand its breakfast hours. While these initiatives offer potential, McDonald's isn't quite as technologically advanced as the much smaller Tim Hortons. This small coffee and sandwich shop is making moves that are likely to lead to future growth. Considering the geographical expansion and operational improvements of Dunkin' Brands as well as the well-established and high-demand locations of Starbucks restaurants, Tim Hortons is going to need to hit on all cylinders.

The ultimate guest experience
Tim Hortons' goal is to provide 'the ultimate guest experience,' but any restaurant can make that statement. What matters are the details. Fortunately, it looks as though Tim Hortons will deliver in this area.

For instance, Tim Hortons is ahead of the curve by offering double lanes at many of its drive-thru locations. This should help expedite service, which customers will surely appreciate. While Dunkin' Donuts is a favorite of millions of consumers across the country, its popularity also leads to massive lines at the drive-thru in the mornings, which customers don't like. If there's a Tim Hortons nearby and a consumer can get their coffee and sandwich there quicker, then they might give it a go.

Tim Hortons hasn't neglected the dine-in experience when it comes to speed. It not only added express beverage lanes in many restaurants, it added mobile payment capabilities as well. It's also testing a soup and sandwich station.

All of this sounds futuristic, doesn't it? That's the point. Tim Hortons has figured out what the future will look like and it is implementing initiatives to match those trends before its peers.

Other examples of innovation include the single-source point-of-sales system arriving this spring (customers will be able to pre-order and pre-pay, allowing them to skip the line), digital menu boards arriving soon (easier for staff and customers and they will allow Tim Hortons to push new and higher-margin products), and a co-branded payment card in partnership with CIBC and Visa (consumers accumulate Tim Hortons rewards points while spending at other retailers). The latter is likely to lead to increased traffic. Whether profitability increases will depend on whether or not new customers are impressed enough to return, and whether or not regular customers add to their orders since they're getting at least part of their meals for free. While it's impossible to determine how the numbers will play out, the initiative is likely to lead to increased brand recognition, which is a positive.

Highly efficient
To give you an idea of how efficient Tim Hortons has been on a consistent basis, consider the chart below:

THI Revenue (TTM) Chart

THI Revenue (TTM) data by YCharts

When a company's revenue outpaces its SG&A expenses, it's often the sign of an efficient and high-quality company. Tim Hortons has consistently delivered in this regard.

Tim Hortons is also trading at just 15 times forward earnings, whereas McDonald's, Starbucks, and Dunkin' Brands are trading at 16, 24, and 25 times forward earnings, respectively.

Starbucks has delivered the strongest top-line growth, of 40.21%, over the past five years, and there have been no hiccups. Tim Hortons has seen top-line growth of 26.27% over the same time frame. While that growth has slowed to a paltry 0.30% over the past year, recent initiatives should help restart the engine.

Over the past five years, Dunkin' Brands and McDonald's have delivered respective top-line growth of 23.69% and 16.74%. It should be noted that Dunkin' Brands has picked up the pace over the past year, showing top-line growth of 6.92%. Domestic geographical expansion for Dunkin' Donutes has the potential to pay off in a big way. 

All four of these companies are likely to remain long-term winners, but Tim Hortons is the most attractive on a valuation basis. McDonald's might look more attractive, but it doesn't offer nearly the same growth potential.

Tim Hortons currently offers a dividend yield of 2.10%. This isn't as generous as McDonald's, which currently yields 3.40%, but it's more generous than Dunkin' Brands and Starbucks, which yield 1.80% and 1.50%, respectively.

The foolish takeaway
All four of these companies are winners, but in different ways. There are several reasons why Tim Hortons looks attractive, including its ability to innovate ahead of industry trends, valuation, and its somewhat-generous dividend yield. Please do your own research prior to making any investment decisions. 

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Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends McDonald's, Starbucks, and Visa. The Motley Fool owns shares of McDonald's, Starbucks, and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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