Scout Capital Management Buys Up 5.5% of Tim Hortons Inc. (USA) (THI)

Peers for Tim Hortons Inc. (USA) (NYSE:THI) include Dunkin Brands Group Inc (NASDAQ:DNKN), Starbucks Corporation (NASDAQ:SBUX), Panera Bread Co (NASDAQ:PNRA), and McDonald’s Corporation (NYSE:MCD). We’ve mentioned that the market is generally assigning high multiples to quick service restaurants, and we can see that the forward earnings multiple for McDonalds is 16 with the other three companies valued at 23 to 25 times consensus earnings for the forward fiscal year. This places Dunkin, Starbucks, and Panera at a premium to Tim Hortons Inc. (USA) (NYSE:THI) on that basis but those companies have generally been experiencing better results. Starbucks and Panera, for example, each delivered double-digit growth rates on both top and bottom lines in their most recent quarter compared to a year ago (Dunkin’s performance has been more questionable, however). As such those two restaurants may well deserve that valuation premium. Growth at McDonalds has been more modest, making it not too appealing from a value perspective at current pricing, but it could easily be a defensive play with a beta of 0.3 and a dividend yield of 3.1%.

Investors interested in quick service restaurants may want to watch Tim Hortons to see what Scout is up to, but we don’t recommend buying at this time. With same store sales down, and with the addition of new locations apparently negative for earnings, the company would seem to have a tough path towards growth in net income and the current valuation is assuming good performance over the next several years. QSRs generally trade at high multiples, though with a couple of Tim Hortons’ peers in better shape it’s possible that those businesses can end up justifying their current valuations.

Disclosure: I own no shares of any stocks mentioned in this article.