Recession proof stocks and Tim's
Two of my favorite stocks, Lulu & RIM, reported better than expected earnings this week and released strong guidance for 2008. They demonstrated their businesses were not affected by the recession in the US (yet), and their stock prices were bid up by investors who believed that these companies could grow earnings even during the economic slowdown.
Then I started to think of other stocks which would grow earnings during this year. Ironically, we were sitting in one chatting stocks over breakfast this week: THI. This is a consumer staple with a growth side coming from US expansion. THere's line ups every morning at every Tim's I've ever seen. Management has done a remarkable job transforming a low end donut shop to a coffee and lunch destination by marketing to a wider demographic with "fresh and healthy" soups and sandwiches.
Further, they partnered with Walmart a few months back which automatically gave them access to prime retail real estate in the US (ie. WMT stores).
The stock, currently rebounding to $35, has been remarkably non-volatile during the past few month (beta = 0.91) ranging from $30 to $40 over the past year. THeir PE is 25 but the PEG is 1.43, which just says their price is supported by their growth rate. I think this is the recession proof growth stock that we have been looking for.
Thoughts? Your support would be welcome, and your opposing views will be ridiculed :)
posted by Junk Bonds @ 4/04/2008 08:13:00 PM
9 Comments:
THI is intriguing for its defensive qualities. Unfortunately, it's only value characteristics come in the form of its coffee and timbits.
Its P/E is 25 and its P/S 3.5 and its EV/EBITDA is 14.6. On all measures SBUX is cheaper...ah but what of the growth prospects? SBUX is now suffering because of slowing growth prospects - call it the curse of falling off the growth wagon. THI's numbers are showing a deceleration of revenue growth (yoy) just like SBUX, yet SBUX's latest year revenue growth was still higher 17.5% (yoy)
Yes I know THI and SBUX serve different ends of the coffee chain spectrum, but we're talking defense here right?
If you chart THI since its IPO, you're right its pretty stable, but its pretty flat too (unless you picked some up at $28). You haven't made much since the IPO.
SBUX is down over 40% in the last year with higher margins, higher absolute growth rates (compared to THI) and lower metrics of valuation.
So what's it going to be? THI makes its SSS target and upside 10%? (most likely) THI misses or has "weather related" issues and the stock tanks.
SBUX's highly publicized troubles are baked in the cake as you'd say! Any positive surprise and it would be a good 'defensive' trade.
Oh and the Walmart thing is with Walmart Canada, and it's only a handful of stores.
My bad on the Walmart US partnership comment. I hope they don't abandon their US expansion plans as a result :) I suppose when they do announce their agreement with WMT will be extended to the US, *then* it will be time to buy THI... or will it be too late :)
Des, you have an great knack for using inapprop historical stats to support future predictions. Yes, SBUX had 17.5% REV growth (vs 10.5% for THI) last year but their EARNINGS growth was 1.5% while THI's was 11.5%. (The keen observers will note that THI had Profit Margin expansion while SBUX had contraction.)
Why should any company be valued on REV growth? Anyone can open stores forever to achieve REV growth. SBUX was losing money opening stores! No wonder the stock has been pummeled. Every company should be accurately valued on future earnings and their growth. Now I cannot see the future so let's see what the analysts have to say:
YoY Earn Growth Est for SBUX, 2008=11.5%, 2009=16.5%
YoY Earn Growth Est for THI, 2008=22.4%, 2009=14.6%
I don't know how these analysts can see into 2009 (probably some reversion to mean forecast), but THI is predicted to grow earnings twice as fast as SBUX in 2008. SBUX is a value trap especially with MCD's taking away the coffee market share from SBUX during the US recession. I have been impressed with THI management for years and SBUX has shown they don't know the difference between revenue and profit growth.
In terms of past performance, I wouldn't call THI "flat". It's had some pretty good out-performance relative to the market (+ve alpha). I would say 15% over the past year vs -5% on TSX and S&P, so net +20% (done with low beta). Plus, it's had some good Relative Strength (RSI)in the last 6months during the "recession watch".
And what's with the "10% pop vs miss/tank"? Are we day traders now!?!? This is a low beta, high alpha, long term defensive growth stock with proven management.
And I forgot the main reason why THI came back on my radar. I saw a note the other day on the counter which says they are raising menu prices this Mon April 7. In the past, they have raised their coffee prices several, but I have not seen the line ups get any shorter. I can imagine the stock could be hit next week when the traders find they had to pay an extra nickel for their "large dbl dbl". This could be a buying opportunity at $34.
I think THI is fully valued. Low beta notwithstanding.
Where do these analysts get there info? I looked up on TD Newcrest a research report on THI and they predict 14% earnings growth for 2008 and 14% for 2009.
Looking at the past results:
EPS 2005 1.19
2006 1.40
2007 1.43
EBITA (not adjusted per share)
2005 $366 mil
2006 $391
2007 $432
The predicted earnings from your sources appear high based on recent results - 22.4% for 208 and 14.6% 2009? I'm leery of analysts in general.
The research report I was reading was blaming the 'bad weather' in the Northeast for slowing traffic in THI stores. I'm not sure if this was the corporate response, but I'm tired of hearing about weather related reasons for poor retail sales. (and I thought the weather was only for Ng related stocks!)
I found in the 4th quarter report that over the last two years the number of THI stores increased by around 200 per year and total number of stores at the end of 2007 was around 3200 units.
What was more interesting was that there overall costs are up 10.8%. Could this announced increased in their menu prices be attributed to the higher input costs of milk, cream and flour? Food price inflation has been widely reported recently.
Most of the THI stores are franchised. Are the increased costs eaten by the local owners? Are the royalties calculated on their gross revenues? THI also owns the bakeries, coffee roasters, and distribution so increased inflation of inputs would certainly hurt their bottom line.
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Des, all businesses have cost inflation (wages, materials, etc.) You are missing the point: they had 11.5% Earnings growth despite 10.8% cost inflation. Further, they are raising prices today to pass the costs onto the consumers. Remember, SSS growth can be acheived thru 1) increased unit sales, and/or 2) higher prices.
All these Revenue growth, and cost inflation, and weather related stuff are all poor excuses for not liking a growth stock.
Anyways, I'm just looking for an investment better than cash. Just no SBUX!
I found yet another source with differing EPS numbers that support your higher growth numbers.
EPS 2005 $1.02
2006 1.20
2007 1.43
This S&P report is projecting 2008 earnings of $1.60 which is about 11% earnings growth. I find it remarkable that even historical numbers are quoted differently depending on the source. If these numbers are to be believed, we still have earnings growth deceleration.
So we are expecting a 11% appreciation of the THI stock price with lower beta?
I generally never pay attention to beta but I understand its usefulness especially when the markets are as volatile as they have been recently.
Interestingly 3M has a beta of 0.71 and over 10 years has easily beat the S&P but over the recent past has underperformed. Recent underperformance is where I go looking for overlooked companies.
Ah, the beauty of pro-forma earnings; everyone has a different take!
I'm not sure what's the big deal about linearizing annual profits. You don't seem to be doing that for SBUX :). The profits can jump quickly if they decide to slow down the rate of new openings, to realise more of the profit potential, instead of plowing it back into new stores. According to the 10K it seems that is what they are doing; probably a well advised move during the US recession. The 22% target was agreed upon by management guidance and analysts. If not, they would pre-announce missed targets. Is it "baked" into the price? I dunno, there could be many skeptics.
For many years Tim's was the main growth driver for WENdy's and I'm not sure their successful product and strategy can turn into a dog overnight.
BTW, my numbers are from Yahoo Finance which is a concensus estimate. I found this is almost always the number they report when a company has met or beat "street" estimates.
I was generally in favour of investing in Tim. But I am more reluctant now after my recent trip to Michigan and reading an article in Maclean’s.
In my trip I asked the opinion of a group of my friends living south of the border about Tim’s coffee. It was generally negative. They were complaining about virtually everything, they did not like the taste, they did not like the fact that they could not customise their coffee and that the cappuccino is not real… Anyway it seems that their taste and habits are trained by Starbucks!
The Maclean’s article suggests the same thing. It argues that:
• “Tim Hortons' conquest of Canada is virtually complete” as “there is now a Tim Hortons restaurant for every 12,500 Canadians, nearly double its closest competitor, McDonald's”.
• “south of the border things haven't gone so well”. The plan was to open 500 stores by 2007 but so far less than 400 stores have opened. That is while “Quiznos Subs, for instance, set up shop in Canada in 1996 and today operates nearly 440 restaurants, in a market one-tenth the size of the U.S.”
• And even worse “U.S. stores currently account for roughly 10 per cent of Tim Hortons sales, but don't generate any real profit.”
• Here is one reason: "The company rose to dominance here by forging close ties to hockey and wrapping itself in the maple leaf. Dunkin' Donuts, in contrast, uses slogans like "America Runs on Dunkin" and fills its ads with baseball, football and basketball imagery.
So overall it does not sound very promising!
Oh I forgot to add the link:
http://www.macleans.ca/business/companies/article.jsp?content=20080312_112770_112770&page=2
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