Tim Hortons: An Established Brand With Strong Growth Opportunities

| About: Restaurant Brands (QSR)

Shares of Tim Hortons Inc (THI), the most prominent Canadian based quick service restaurant chain, offer investors an opportunity to invest in an established brand that has plenty of room to grow. As of its last earnings report, the company has 3,365 Canadian restaurants and has 755 restaurants in the U.S. Unique for its wide array of service methods and restaurant layouts, the company has a list of growth initiatives that give it a promising future.

From a valuation standpoint, Tim Hortons shares are accurately valued. The company is expected to grow earnings per share by 12 percent annually for the next five years, which puts it ahead of the curve for mature restaurant chains. Revenue and earnings per share have grown in each of the previous three years and this trend is expected by analysts to continue. With a December 2013 forward P/E ratio of 16.4, shares aren't cheap, but they are definitely at a respectable entry level. At the close of February 18th, shares traded at $49.54, well below its 52 week high of $58.47. Tim Hortons' miss in its last earnings report caused its shares to drop by 5.4 percent in one day, but there has been some recovery since then.

Tim Hortons' growth initiatives have aspects similar to those of the quick service giants, yet there is still a lot of room for same store sales growth. In fact, the top group of growth initiatives on its investor site reference growth in same store sales. Its top priority is moving its product line beyond just the morning, which is very similar to Dunkin Brands' (NASDAQ:DNKN) strategy. Most importantly, the company references menu innovation in its U.S. stores, which now account for 18.2 percent of its global footprint. Tim Hortons has still not been able to place itself in the company of America's top coffee shop brands, and there is a lot of room for growth if Tim Hortons' brand and popularity can come close to those of Starbucks' (NASDAQ:SBUX) and Krispy Kreme's (KKD).

The company also hopes to expand through the use of strategic partnerships. It already has more than 100 dual stores with Wendy's in Canada and it would not be surprising to see this partnership cross over into America. The investor site also references a partnership with Cold Stone Creamery, which could compete with Dunkin Brands' combination Baskin Robbins and Dunkin Donuts restaurants. Strategic partnerships like these can help the company expand its footprint in the U.S., while improving its brand image and boosting same store sales.

Tim Hortons is expected to release earnings on February 21st before the market opens. Analysts expect earnings of 72 cents per share and revenue of about $827 million. The company's corporate structure has a lot of moving parts, including a quarterly dividend that is expected to increase, a recent reorganization that has put a 5 cents per share dent in earnings in 2012, and a share buyback program. Because Tim Hortons' has so many different things that can go wrong and missed badly in its last earnings report, I recommend laying off of shares until after earnings. With a promising report, investors looking for a unique position in the quick service restaurant industry should consider going long on Tim Hortons.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Tagged: , Restaurants, Earnings
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