If you follow the foreign exchange markets, you are probably aware of the Canadian dollar's rise against its U.S. counterpart. Canada's currency has now eclipsed the value of the U.S. dollar -- it now takes roughly $1.05 U.S. dollar to buy one Canadian "loonie."
The rising Canadian dollar is symptomatic of Canada's strength and fiscal stability. The country has remained economically robust, even during tough times for much of the rest of the world.
What is the best way for U.S. investors to participate in the economic strength of "the great white north?"
While you may be tempted to buy a solid Canadian bank or an oil and gas play, I've found a Canadian trade that not only offers an attractive dividend, but also shows strong technical and fundamental growth potential.
This company -- which is a hallmark of the Canadian landscape -- is the largest publicly-traded quick service restaurant chain in Canada and the fourth-largest fast-food chain in North America, based onmarket capitalization.
Specializing in fresh brewed coffee, donuts and baked goods, you can bet your loonie nearly every Canadian has been a patron of Tim Horton's (NYSE: THI).
To its core, Tim Horton's is a Canadian icon. The restaurant was co-founded by ice hockey star Tim Horton, who as a Toronto Maple Leaf ruled the classic Canadian sport from the 1950s through the 1970s.
To its core, Tim Horton's is a Canadian icon. The restaurant was co-founded by ice hockey star Tim Horton, who as a Toronto Maple Leaf ruled the classic Canadian sport from the 1950s through the 1970s.
Today in Canada, 80% of all purchased coffee is from Tim Horton's. And per capita, Canadians consume the most donuts in the world. Fittingly, Canada also has the most donut stores per capita on the planet -- a majority of which are Tim Horton's.
At the beginning of 2011, there were more than 3,100 Tim Horton's locations in Canada. The company plans to open an additional 160-180 Canadian stores in the coming year.
The restaurant chain has edged its way into the States, battling against privately-held Dunkin Donuts as well as Starbucks (Nasdaq: SBUX). There are currently more than 600 Tim Horton's locations in the United States, with plans to add another 70-90 stores this year.
Tim Horton's is also expanding outside North America, with plans to open 120 restaurants in the United Arab Emirates and surrounding countries.
Such explosive growth should boost the company's future revenue and earnings potential.
Technically, THI appears strong.
The stock has been on Major uptrend for nearly two years and is currently trading at an all-time high around $48.
Tim Horton's shows no signs of slowing down. The stock briefly encountered minor resistance around $47.50 during March this year, but in April it broke through resistance, completing a bullish ascending triangle pattern. As such, the trend from here should be up.
The measuring principle for a triangle -- taken by adding the height of the triangle to the breakout level -- projects a price target of $64.77 ($48.01 - $31.25 = $16.76; $16.76 + $48.01 = $64.77).
Tim Horton's is also appealing from a fundamental standpoint.
The company reported fiscal fourth-quarter and full-year 2010 results in late February 2011. Although revenue for the quarter dropped 3.5% to $643.5 million (Canadian, CDN) from $667 million in the year-ago period, same-store-sales (revenue from stores open at least a year) increased 3.9% in Canada and 6.3% in the United States, showing important overall growth.
For the full 2010 year, revenue increased 4.1% to $2.5 billion (CDN), from $2.4 billion (CDN) in 2009, due in part to the sale of the company's 50% joint-venture interest in Maidstone Bakeries.
This year, the company expects same-store sales to rise a further 3-5%, resulting in 6.8% sales growth, or revenue of $2.7 billion (CDN). By 2012, analysts' project revenue will increase a further 6.7%, to $2.9 billion (CDN).
The earnings outlook is equally strong.
Due to the one-time sale of the company's 50% joint-venture in Maidstone Bakeries, fourth-quarter earnings surged 329.4% to $2.19 (CDN) per share, from $0.51 (CDN) in the year-ago period.
By this same token, full 2010 earnings soared 118.3% to $3.58 (CDN), from $1.64 (CDN) in 2009. Excluding the one-time bakery sale, earnings were $2.15 (CDN), representing a 31% increase from the previous year. This earnings gain was driven largely by higher profit margins, due to a shift in donut production from donuts made in-store to using pre-frozen batter.
For full-year 2011, Tim Horton's projects earnings will be in the range of $2.30-$2.40 (CDN) per share, representing at least a 7% increase as it expands its presence internationally.
By 2012, analysts' project earnings will rise a further 17% to $2.81. Even with rising coffee prices -- which recently hit a 30-year high -- Tim Horton's should maintain strong future profit margins, since it uses forward currency contracts to lock-in fixed coffee prices half a year to a year in advance. The company also passes on the higher costs to restaurant owners so customers don't have to pay more for their Cup of Joe.
In addition to growth potential, Tim Horton's is attractively valued, with a trailing price-to-earnings (P/E) ratio around 13.
Based on this P/E, the company has a solid PEG ratio (P/E divided by estimated growth rate) of about 0.74 (15/17.5). A PEG ratio under one usually shows solid value.
In the most recent quarter, the company announced plans to buy-back up to $445 million (CDN) of shares
In the most recent quarter, the company announced plans to buy-back up to $445 million (CDN) of shares
A bonus for traders, the company also announced plans to increase its quarterly dividend by an attractive 31%, to $0.17 per share (CDN). Traders interested in purchasing THI will likely see future dividend increases, as the company has consistently increased its quarterly dividend since 2006.
Given that THI is attractively valued, shows growth potential and appears technically solid, I plan to go long on the Canadian icon. I will enter a position at the opening of trading on Monday, April 25. I am setting a stop-loss of $34.57, just below historical support. Based on the measuring principle my target is $64.77.
The risk/reward ratio is approximately: 3.34:1.
The risk/reward ratio is approximately: 3.34:1.
Action to Take --> Based on the analysis above, I recommend trading THI by entering the position at the opening of trading on Monday, April 25, 2011, and setting a stop-loss at $34.57 and a target of $64.77. This way, I believe the potential profit in the trade could be 35% or more.
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