Analysts See Continuing Strength From Tim Hortons' Canadian Operations

Tim Hortons Inc.'s (THI) U.S. segment financial results for first quarter didn't live up to expectations and investors are taking note, trading down the stock as much as 2.5% at mid-afternoon on Friday.

But for at least two analysts, the strength of Tim's Canadian operations more than offsets the ongoing challenges stateside.

Not living up to expectations is a description that applies to virtually all U.S. quick service restaurant operators for the first quarter of 2007, analyst Irene Nattel of RBC Capital said in a note to clients.

“Investors should remember, however, that the driver of [Tim's] earnings growth is the Canadian operations, as the U.S. remains in investment mode.”

Ms. Nattel said the real takeaway for investors is Tim's strong growth in the quarter, despite the weakness down south.

She highlighted the 13.9% year-over-year increase in revenue from C$372.8 million to C$424.6 million and the company's C$94.2 million operating income that was up 13.3% from a year ago, saying Tim's maintained tight control over its cost structure even as it continues to deal with incremental costs associated with now being a publicly traded company.

The company's net income was up 10.8% to C$59.3 million, while the company's earnings per share declined 5.9% to C31¢ due to a higher share count.

Ms. Nattel reiterated her “outperform” rating on the stock and left her Canadian price target of C$41 unchanged. She raised her U.S. target from US$35 to US$37 due to changes in exchange rate forecasts.

UBS analyst Peter A. Rozenberg also left his “buy” rating and C$42 price target unchanged, saying Canadian operations will remain strong, while U.S. profits will take time to improve.

“We think Tim's is an exceptional business due to a strong brand, very profitable franchise income, high returns, strong cash flow, good same store sales and unit growth, and low risk business model,” he wrote.