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Tim Hortons – Value or Growth?

Richard Croft
May 20, 2014
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The Company is a Canadian icon. Like Canadian Tire, Hudson’s Bay and even the Timothy Eaton Company once Canada’s premier department store.

Despite the familiarity of these brands in Canada there has been little evidence that Canadian brands carry any weight south of the 49th parallel. Canadian Tire being a case in point. That company tried to move into the US during the 1980s with no success. Quickly abandoning the strategy before it caused irreparable damage to the company.

I raise this issue because Tim Hortons (symbol THI, Recent price $59.98) is embarking on a similar strategy and for me at least, it is not clear it will be successful. When you think about it Wendy’s once owned THI and they sold the company because it could not penetrate the US market. I have little confidence that THI management as a standalone entity will fare any better.

In my view there is simply too much competition in the US – Dunkin Donuts, Starbucks and even McDonalds with their McCafe franchises – that have brand loyalty similar to THI’s success in Canada. My concern is that the company is basing a large part of its growth strategy on its US initiative.

Now to be fair THI is also expanding into Western Canada which I believe has a good chance of success. The problem may be in how much of the company’s resources get tied up in their US experiment and whether or not that will cause growth to come in less than what the market has priced into the company.

So I am torn. I like the company’s long term potential but over time I think the market will begin to value the company as a mature business rather than a higher multiple growth story. If so then we are talking about excellent cash flow which will have to find its way back to the shareholders in the form of higher dividends and stock re-purchase programs.

Given that I would argue that this is a solid company that deserves a place in ones’ portfolio but with a set of metrics that focus on value. Understanding that the PE might contract as the market shifts its focus from growth to value! In that scenario you might want to look at option strategies that limit upside potential but provide enhanced cash flow.

For example you might look at implementing a regular covered call strategy against part of your THI exposure. With THI near $60 per share the sale of the at-the-money June 60 calls at $1.00 per share or better look interesting as a starting point. Should they expire worthless write new calls with a one to two month window to expiry.

Richard Croft
Richard Croft http://www.croftgroup.com/

President, CIO & Portfolio Manager

Croft Financial Group

Richard Croft has been in the securities business since 1975. Since February 1993, Mr. Croft has been licensed as an investment counselor/portfolio manager, operating under the corporate name R. N. Croft Financial Group Inc. Richard has written extensively on utilizing individual stocks, mutual funds and exchangetraded funds within a portfolio model. His work includes nine books and thousands of articles and commentaries for Canada’s largest media channels. In 1998, Richard co‐developed three FPX Indexes geared to average Canadian investors for the National Post. In 2004, he extended that concept to include three RealWorld portfolio indexes, which demonstrate the performance of the FPX portfolio indexes adjusted for real-world costs. He also developed two option writing indexes for the Montreal Exchange, and developed the FundLine methodology, which is a graphic interpretation of portfolio diversification. Richard has also developed a Manager Value Added Index for rating the performance of fund managers on a risk adjusted basis relative to a benchmark. And In 1999, he co-developed a portfolio management system for Charles Schwab Canada. As global portfolio manager who focuses on risk-adjusted performance. Richard believes that performance is not just about return, it is about how that return was achieved.

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