Tim Hortons Has Room For Growth Both Nationally And In The U.S.

| About: Restaurant Brands (QSR)

New Tim Hortons (THI) opens in rest room of existing Tim Hortons and now the rest room line up is longer than the one in the front.. Actually, joking aside, I sometimes think that opening a new Tim Hortons in the rest room of another Tim Hortons would be a success. An article was published in The Onion in 1998 that marked the failures that caused Starbucks (NASDAQ:SBUX) to shut down some stores. The title was "New Starbucks Opens In Rest Room Of Existing Starbucks." It's a pretty funny article which you should read when you have a few extra minutes.

Although Canadians will most likely relate to the headline due to the massive number of Tim Hortons in Canada, I do not think the Starbucks dilemma applies here. Let me explain my thesis more closely. Starbucks is more expensive and only became a success due to catering to people looking for the elite coffee shop experience. People are willing to pay more to be part of that elite group. Now having a Starbucks in every corner diminishes its value in that perspective. Tim Hortons on the other hand is catering towards convenience and price. It tastes OK but is cheap and convenient, so Canadians love it. I sometimes think it should be the national symbol for Canada. Let me further explain by walking you through one of my typical mornings.

I drive out from home and maybe 3-4 times a week feel like dropping by Tim Hortons on the way to work. The coffee in our office tastes horrible and breakfast sometimes comes in handy. Now I have two Tim Hortons in the same block close to my house. One is a full serve with a drive through and the other is a satellite station inside a gas station. The cars lined up in the drive through go all through the parking lot, on to the street and wrap around the second Tim Hortons. For the record, the second Tim Hortons also has an incredibly long line up. So I stand in that 20+ car line up and within 5 minutes I am at the window. Two people pop out of that small window. Card, card, enter you pin, bagel, I will hold on to that while it clears, coffee, bagel, card, thank you. What just happened there? I don't know but I am driving down the road with my coffee and bagel. They are extremely efficient and fast. I never see that kind of efficiency at McDonald's (NYSE:MCD) or any of the other major chains.

Now that I have explained to our fellow neighbors from down south the Tim Hortons story in Canada, the next question is whether this is a good investment. A great investment at the wrong price is not really a good investment at all. So it really comes down to whether they can expand in the US and internationally and are reasonably valued. I will leave discussing international expansion to another day, although I have to note that every time I go down to the Middle East for business, I need to carry with me a bag full of Tim Hortons coffee boxes for everyone that keeps on asking for it.

Canada's population is about 30 million, while the US is about 300 and the world is 6 billion. If Tim Hortons can have even a tiny fraction of the success it has in Canada, it would be a great growth story. I also really like Tim Hortons' expansion strategy of expanding in states that are close to Canada and have a lot of Canadian traffic. I think this is turning out to be a success.

Since I seem to suffer from the confirmation bias syndrome, I would really recommend readers use the comments section to bring to our attention their perspectives and their experiences with Tim Hortons. I am specifically interested in Americans' stories about the Tim Hortons in their respective states. Feel free to comment on why you think THI may fail at expanding.

I first bought THI when it was around CAD $30. THI has nearly doubled while increasing their dividend six times since they became public. Not a bad investment if you ask me. Since THI has been dropping lately due to global economic issues and a tiny earning miss, I am getting ready to reload my gun and pull the trigger on some more shares. Now we also have an idea about how THI reacts during recessions after seeing the reaction to the last one. It has survived the last recession pretty well since it was not part of the discretionary spending that people cut off or reduced. When times are tough people stop buying Coach (NYSE:COH) hand bags but may go more often to Tim Hortons for a coffee.

Do I advocate buying THI at this level? No, I have to admit that although THI still has room to expand in Canada it will not be such a great buy unless it succeeds in expanding internationally, namely in the US. Since I prefer buying undervalued growth companies I would prefer to pick up THI at a PE of less than 20. Of course this is not the only valuation metric but I will leave other valuation methods for another article. Also, a PE of 20, while not ridiculous like Facebook (NASDAQ:FB), is still kind of high for my liking. I am willing to pay a premium for the huge growth potential but I am aware of the risks and prefer to skip the premium, if possible. I can write another article about the details of the finances of the company if there is enough interest. For now, I am suggesting selling naked puts on THI if it drops to around or below $50. This allows you to make some money while waiting for THI to drop a bit more and buying it at a discount if it does. An easy way to get paid to wait for a more reasonable price.

Disclosure: I am long THI and may initiate another position to buy more THI or sell puts.