02.26
Tim Hortons (THI): $32.26 – Q4/09 Results Solid And In-Line
Outperform, Average Risk, Price Target: $38.00
THI’s solid value positioning with consumers and focus on controlling costs enabled the Company to deliver 7% operating income growth in Q4, in line with forecast. THI raised its annual dividend from $0.40 to $0.52 (ahead of RBC CM’s expectation
of $0.44/year), representing a payout rate of 30% as part of a revised payout policy of 30-35%, at the high end of Canadian consumer oriented stocks. As expected, the $200 MM share buy-back was also renewed. Since mid-November, equity markets have begun pricing the earnings recovery in the space, boosted by better than expected Q4 results from a number of names, driving the Fast Casual average P/E from 16.5x to 17.4x, more than one multiple point ahead of THI’s own valuation multiple (exhibit 6). Given THI’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 over time.
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