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Tim Horton’s Stock Is Best Left on the Table

Too much competition and little growth signals a sell for Tim Horton's


Tim Hortons THIThanks to rough weather and intense competition, it has been extremely tough for the restaurant industry as of late. Many names in the space have been clobbered on the sales front, and have seen their share prices slide as a result.

While this trend has impacted many U.S.-focused restaurants, it has also hit Canadian firms too, as many of these companies are dealing with the same trends. This is particularly the case for one of Canada’s most famous chains: Tim Horton’s (THI).

Tim Horton’s in Focus

THI is an Oakville, Ontario-based quick service restaurant chain focusing on specialty drinks, sandwiches, and other prepared foods. The firm has over 3,500 locations in Canada, while it has nearly 1,000 in other nations with the vast majority of those international restaurants setting up shop in the U.S.

The firm has been expanding at a feverish pace, but many don’t seem to be buying the potential of this growth trend, and are looking for more dividends or buybacks instead. While THI had a decent sized share buyback, expansion looks to continue unabated and the cost of this expansion could hit earnings in the near term.

Additionally, heavy competition from big players like McDonald’s (MCD) and Starbucks (SBUX) on THI’s home turf of Canada is leading many consumers to other stores, or forcing Tim Horton’s to compete on value.

These trends are obviously not good for profits in the near term, and management has recently guided earnings a bit below the broad analyst consensus, a situation which has forced many who are tracking this stock to revise their estimates lower.

Declining Estimates for THI

In just the past week, two estimates for THI earnings for this quarter have gone lower, helping to move the profit consensus from 67 cents a share a month ago, to its current level at 62 cents a share. Now, the company looks to have a growth rate of just 2.3% (year-over-year) for the quarter, though the real damage looks to be in the current and next year time frames.

In these periods, estimates have been drastically cut, pushing the consensus earnings expectation far lower. The consensus for the full year has fallen from $3.20/share 30 days ago to just $2.93/share today, while the next year consensus has dropped from $3.47/share to only $3.24/share right now, producing year-over-year growth rates of, respectively, just 8.1% and 10.5%.

Given the rough trend for THI and the prospect of increased competition in its top market, investors shouldn’t be surprised to note that THI has recently fallen to a Zacks Rank #5 (Strong Sell). So, we are looking for more underperformance from this company, and especially if big competitors find a way to steal share from Tim Horton’s in Canada.

Better Picks

As we discussed earlier, the retail restaurants industry is looking quite unfavorable overall, as the space is currently ranked in the bottom 20%. In fact, at time of writing, six other companies (out of 45 in total) have #5 ranks in this space.

There is, however, a top ranked company in the space, Famous Dave’s (DAVE). This firm has soared to a #1 rank from a #3 rank in just the past week, and given its strong history of beats and high growth prospects, this could be a better way to play the restaurant space in the near term.

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