Starbucks Corporation (SBUX), Dunkin Brands Group Inc (DNKN), Tim Hortons Inc. (USA) (THI): Have Lattes Become Too Expensive?

The Canadian story

Tim Hortons Inc. (USA) (NYSE:THI) is a smaller Canadian player. After exhausting growth in the Canadian market and gaining a very high market share, it decided to take a stab at the much larger U.S. market. Management had dollar signs in their eyes as the population of the U.S. is around ten times greater than the population of Canada.

America has been a challenge for the company. Its U.S. margins have been weak, and recent quarterly comps were -0.5% in the U.S. compared to a -0.3% fall in Canada. In the face of these challenges, it continues to expand with new stores throughout the globe.

Given Tim Hortons Inc. (USA) (NYSE:THI)’ low growth compared to Starbucks, a valuation discount is warranted. The company’s total debt to equity ratio of 0.43 is also significantly greater than Starbucks’. With very profitable Canadian operations and a ROI of 23.1%, Tim Hortons Inc. (USA) (NYSE:THI) is still worth considering, but it is better to wait until it can improve its U.S. operations.

Conclusion

People need their coffee, but investors can leave their latte for another day. Starbucks Corporation (NASDAQ:SBUX)’ revenue growth has been steady, and yet the market has taken the company’s shares for a ride. With a P/E ratio over 30 and a store count over 18,000, it is better to wait. Dunkin Brands Group Inc (NASDAQ:DNKN) is a similar story, the company has substantial growth opportunity in the Western U.S., but that does not justify a P/E ratio around 46. Tim Hortons Inc. (USA) (NYSE:THI) is a smaller coffee retailer, but it looks too expensive given its P/E ratio above 20 and poor U.S. performance.

The article Have Lattes Become Too Expensive? originally appeared on Fool.com and is written by Joshua Bondy.

Joshua Bondy has no position in any stocks mentioned. The Motley Fool recommends Starbucks. The Motley Fool owns shares of Starbucks. Joshua is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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