The Hidden Opportunity In Tim Hortons Inc. (THI)

Starbucks sees these changes, and its large footprint in developed markets is causing it to look beyond coffee. It recently bought Teavanna to gain a footing in the tea market. If Starbucks continues to adopt a “share of stomach” strategy in the name of growth, then it risks losing their original differentiator: a European-style coffee experience. Wall Street loves growth, and Starbucks may have to sacrifice its ethos in order to serve the financial overlords.

Right now, the company has a clean balance sheet with a total debt to equity ratio of 0.11. Its ROI of 25.1% is strong. The firm’s five-year EPS growth of 28.56% and five-year revenue growth 6.06% show increasing margins. Such strong growth is amazing for a company of Starbucks’ size, and the company is priced accordingly, with a P/E ratio of 30.6. The firm is attractive, but its desire for high growth should cause long-term investors to hesitate before investing.

The Dunkin Donuts Dilemma

Dunkin Brands Group Inc (NASDAQ:DNKN) recently IPOd after being saddled with larger amounts of debt by its previous private equity owners. This coffee company is different from Starbucks and Tim Hortons, because it operates a very asset-light model where almost all of its stores are franchised.

Dunkin’ Donuts is the company’s main brand, though Baskin Robins’ U.S. operations made up 7% of 2012 revenue. Dunkin’s total debt-to-equity ratio of 5.84 is not a pretty number. Even with this debt load, the company uses 65% of its earnings to pay a 1.6% dividend.

The firm is heavily focused in the U.S., with 82% of sales coming from that country. America’s stubbornly high unemployment rate and economic slowdown aren’t going away any time soon, and Dunkin expects 2% to 4% comparable same-store sales growth in the U.S. for 2013. The company is planning for growth with a slow expansion out of the Northeast. Regardless, its $1.8 billion in long-term debt is a major risk that should make any investor very cautious.

Conclusion

Of the three companies discussed above, Tim Hortons provides the most unique growth opportunity. Its Canadian operations are a profitable base for the company. These earnings can be plowed into Tim Hortons’ U.S. operations to drive growth. Perhaps most importantly, Tim Hortons is much smaller than Starbucks — and it doesn’t have to abandon its coffee culture to find growth.

The article The Hidden Opportunity In Tim Hortons originally appeared on Fool.com and is written by Joshua Bondy.

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