Tim Hortons Grows While Market Slows

BOSTON (TheStreet) -- Wall Street is lukewarm on Tim Hortons(THI), a quick-service restaurant chain that sells baked goods, coffee and sandwiches. Of analysts covering the company, 36% rate its stock "buy" and the remaining 64% rank it "hold." Yet, the TheStreet's stock model ranks it as the top U.S. restaurant stock based on risk-adjusted performance.

Although Tim Hortons isn't a household name in the U.S., it is in Canada, the country with the highest tally of per-capita doughnut shops. Tim Hortons is the largest food-service company in Canada, with over 2,800 stores, 95% of which are franchises. It boasts leading market share in the Canadian baked-goods and coffee market. It has 500 locations in the U.S. Once a subsidiary of Wendy's(WEN), Tim Hortons was spun off in March of 2006. Its stock has returned 26% since then, while the S&P 500 Index has dropped 19%. Management is expanding in 10 U.S. core markets, which include Maine and New York.

Tim Hortons still runs joint locations with Wendy's, though the franchises are no longer under the same umbrella. It has also aggressively added dual venues with privately held Cold Stone Creamery, a "super premium" ice cream parlor that sells store-made, high-butterfat ice cream mixed with toppings on a frozen granite stone. There are now 70 co-branded locations. Management recently boosted its 2010 target for co-branded locations by 20 to 25 restaurants, a potential 42% increase for the year, because of operating success. A pending $475 million CAD sale of a 50% stake in Maidstone Bakeries may bring a special dividend or buyback extension.

As for the numbers, second-quarter net income increased 21% to $94 million, and earnings per share climbed 26% to 54 cents, boosted by a lower share count. The operating margin extended from 21% to 23%. It exceeds those of restaurant peers McDonald's(MCD), Denny's(DENN), Chipotle(CMG), Panera(PNRA) and Starbucks(SBUX). A net margin of 15% is also quite lofty. Quarterly same-store sales rose 6.2% in Canada and 5.4% in the U.S. despite weaker consumer spending.