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Tim Hortons Inc. (USA) (THI), McDonald’s Corporation (MCD): Why You Need This Restaurant Stock in Your Portfolio

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We are all searching for that one stock that exponentially grows our investment. If you are looking for such a play in the restaurant sector, I can recommend one to you. This company has rewarded shareholders over the last five years with 200% returns, yet it’s still not too late to get in. Actually — as you will see — the biggest growth for this company is still in the future.

Same-store sales

Tim Hortons Inc.What is a good indicator of profit growth in a restaurant? Many investors look towards same-store sales and a company’s ability to grow these sales as an indicator of a company’s growth opportunities.

A restaurant’s ability to retain and grow customers says a lot about the company. Both Tim Hortons Inc. (USA) (NYSE:THI) and McDonald’s Corporation (NYSE:MCD) have fantastic track records in same-store sales.

Company 2010 2011 2012
McDonald’s 5% 5.6% 3.1%
Tim Hortons* 5%** 4% 2.8%

*Canada results. Does not reflect United States stores.

**approximate

McDonald’s Corporation (NYSE:MCD) had nearly a decade of consistent same-store sales growth until October. That month, the company reported that same-store sales decreased 1.8%. Since then McDonald’s has been hit or miss with its monthly same-store sales. But overall, the company has consistently grown this metric.

Similarly, Tim Hortons Inc. (USA) (NYSE:THI) impressively averaged 5.1% annual same-store growth over the last decade. But in the most recent quarter, the company reported that Canadian same-stores sales fell 0.3% — a very small amount — but the first quarterly decrease since the company went public in 2006.

Same-store sales can be an important metric for investors looking to assess the health of a company. But this metric is not the one that is going to reward investors with substantial growth. In the restaurant sector, these opportunities are found in a company’s expansion plans.

Expanding restaurant chains

Both McDonald’s Corporation (NYSE:MCD) and Tim Hortons Inc. (USA) (NYSE:THI) realize same-store sales aren’t enough and they must work to grow their businesses. How are they accomplishing this?

India — the world’s most populous nation — is one place that McDonald’s Corporation (NYSE:MCD) is significantly focusing on. By offering a non-vegetarian menu, and by including happy meal toys from India’s #1 cartoon show, the company is paving the way towards its goal of 500 locations in the country by 2015.

Tim Hortons Inc. (USA) (NYSE:THI), likewise, is expanding its coffee empire to the United States and the Middle East. The company’s expansion in the Middle East is actually ahead of schedule, and it looks to open around 100 locations in the region by the end of 2017, in addition to the 20 it already has.

Company New in 2012 Year-End Total 2013 Target Projected Increase
McDonald’s 970 34,480 1,500-1,600 4%-5%
Tim Hortons 263 4,264 250-290 6%-7%
Buffalo Wild Wings (NASDAQ:BWLD) 74 891 105 12%
Texas Roadhouse (NASDAQ:TXRH) 9 392 33 8%
BJ’s (NASDAQ:BJRI) Restaurants 15 130 17 13%

McDonald’s Corporation (NYSE:MCD) and Tim Hortons Inc. (USA) (NYSE:THI) do a good job with retaining customers as shown with the same-store figures, and they both continue to expand the business. But these growth stories aren’t as exciting as three smaller players: Buffalo Wild Wings (NASDAQ:BWLD), Texas Roadhouse Inc (NASDAQ:TXRH), and BJ’s Restaurants, Inc. (NASDAQ:BJRI).

These three companies look minuscule in comparison to McDonald’s empire, yet these three companies are outgrowing both McDonald’s and Tim Hortons in expanding their chains, and are also outperforming in one other very important metric: net income growth.

Show me the money


BWLD Net Income TTM data by YCharts

Buffalo Wild Wings (NASDAQ:BWLD), Texas Roadhouse Inc (NASDAQ:TXRH), and BJ’s Restaurants, Inc. (NASDAQ:BJRI) focus on growing their total number of locations, and these new locations are converted into higher profits.

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