Have shares of Tim Hortons Inc. gone cold?
Three and a half years after the coffee and doughnut chain went public, its shares are trading for about 5 per cent less than on their debut. Most analysts are cool on its growth prospects, but the company will have a chance to prove naysayers wrong Friday morning when it reports third-quarter results.
Only four of 15 analysts who follow Tim's rate the stock as a buy today.
The summer has been a busy time for Canada's largest publicly traded fast-food chain. The company ramped up its U.S. expansion by opening its first 15 stores in New York City, including stores on Broadway, Madison Square Garden, Penn Station and Times Square.
It also repatriated its head office back to Canada from Ohio, which was both a symbolic and tax-wise move for the iconic brand that was founded 45 years ago in Hamilton, Ont.
Investors watching third-quarter results will be most focused on trends from Tim's U.S. operations, says Irene Nattel, an analyst with RBC Dominion Securities Inc., who this week tweaked her price target up to $38 from $36.
"Investors will be looking for confirmation that despite rising unemployment, [Tim's]is maintaining its relative positioning and performance," she wrote in a note.
She is expecting the company to report that same store sales increased by 4 per cent in Canada and 3.5 per cent in the U.S.
The stock has traded at a discount to the average price multiple for the fast food sector since the middle of the year, but that could be about to change.
"Given [Tim's]relative earnings growth outlook, profitability, returns on equity and capital employed, dividend yield and cash flow profile, we would expect the valuation gap to normalize," she noted.
Ms. Nattel, who rates the stock "outperform" with average risk, increased her price target based on a price earnings multiple of 18 times earnings for mid 2011.
Tim's shares gained 23 per cent in their first day of trading back in March 2006, closing the day at $33.10 on the Toronto Stock Exchange. On Wednesday, the shares were trading at $31.34, up 4 cents on the day.
Despite its laggard stock, Tim's has shown steady growth during the period. Sales rose 23 per cent in its first three years as a public company, and profit climbed about 10 per cent. The company has also raised its quarterly dividend to 10 cents from 7 cents when it went public, yielding 1.2 per cent based on the current stock price.