Tim Hortons is Overvalued

March 22nd, 2006 · 9 Comments

This week, Tim Hortons (TSX: THI, NYSE: THI) will start trading in Toronto and New York. The IPO is so highly sought after that The Ottawa Citizen did a front page story on it last weekend with the headline “Why everyone wants a piece of Tim Hortons?” (Other quotes from the paper: “Investing in an icon”, “Owning a piece of Tim’s has a magnetic, almost mythological appeal” and “I think there will be a lot more heart, a lot more emotional attachment, than usual involved in people’s decisions regarding Tim Horton’s.”). I wasn’t planning on buying the stock but I wonder how retail investors can make money on something that is front page news.

If Tim Hortons was fully valued before, I think it is overvalued now after its recent announcement that the price range of the IPO has been increased to C$25-C$27, an increase of 18% over the previous price range. Tim Hortons has also granted its underwriters the option to purchase an additional 4.35 million shares.

At the mid-point of its new offering range, THI will be trading at a rich 37 times trailing earnings. The company has grown revenues 10% annually and earnings at a 7.5% annual clip over the past five years and has some room to grow in Canada (mainly in Quebec and in the West) but faces plenty of risks in expanding into the U.S. Note that McDonald’s (NYSE: MCD) which has a similar future growth profile to Tim’s (according to ValueLine) trades at a P/E of 17.5. Since I think that a lot of THI’s future growth is baked into the current price, I will just buy myself a medium double-double, roll up the rim and watch the trading madness. Just because the stock is overvalued doesn’t mean it can’t get more overvalued.

Update: There is new blog called THI: The Tim Hortons Stock Watch to “track the action of Canada’s favourite stock”!

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Tags: Investing

9 responses so far ↓

1 tom venner // Mar 22, 2006 at 10:08 am

Just checked TD waterhouse 30 min. ago and THI offering was already posted and closed. Must have sold in seconds.
2 James // Mar 22, 2006 at 11:28 am

You know something is getting a lot of attention and hype when somebody is willing to devote a blog to it…

I’m tempted to dabble in this shortly after ipo if only to try and take advantage of the herd that will be overblowing this stock. There will be money to be made from the momentum of the people flocking to this for sentimental reasons if not financial.
3 GIV // Mar 23, 2006 at 9:05 am

I’m tempted to dabble in this shortly after ipo

If you’re jumping in after the IPO, you are in the herd.

I fully expect it to soar in the hours and days that follow the floodgates being opened. But unless you get in on the ground floor, you stand a chance that the music might stop just as you finally get your shares.
4 Carnival of Investing #15 - Fat Pitch Financials // Mar 26, 2006 at 9:29 pm

[...] Tim Hortons is Overvalued - Canadian Capitalist thinks that based on the IPO offering price, Tim Hortons (THI) is overvalued. [...]
5 Tim Hortons » Canadian Capitalist Tim Hortons is Overvalued // Apr 25, 2006 at 7:42 pm

[...] Canadian Capitalist Tim Hortons is OvervaluedThis week, Tim Hortons (TSX: THI, NYSE: THI) will start trading in Toronto and New York. The IPO is so highly sought after that The Ottawa Citizen did a front page story on it last weekend with the [...]
6 Canadian Capitalist » IPOs are Lousy Investments // May 31, 2006 at 9:19 pm

[...] Tim Hortons (TSX: THI), which went IPO with much fanfare just a few months back, is now trading at $29 after changing hands between $33 and $36 on its opening day of trading. The VoIP provider Vonage (NYSE: VG) went public last week at an offer price of $17. The stock has been in a free fall ever since and closed trading today at $12. Vonage, which operates in a brutally competitive market also managed to alienate its customers by offering them shares before the IPO only to watch it plummet after its debut. Overpriced is a fair description of these investments. [...]
7 Canadian Capitalist » Time to Buy Tim Hortons? // Sep 6, 2006 at 12:19 am

[...] Wendy’s (NYSE: WEN) recently announced that it will be completing the spin-off of Tim Hortons (TSX: THI) by distributing to its shareholders 1.36 shares of THI for each share of WEN by the end of this month. Since it’s IPO in March when it traded as high as $36, THI has been on a slow slide and now trades around $29. [...]
8 Tim Hortons » A Taste for Tim Hortons? // Nov 11, 2006 at 3:03 pm

[...] Canadian Capitalist Tim Hortons is OvervaluedThis week, Tim Hortons (TSX: THI, NYSE: THI) will start trading in Toronto and New York. The IPO is so highly sought after that The Ottawa Citizen did a front page story on it last weekend with the [...]
9 VISA IPO Information // Mar 18, 2008 at 5:01 am

[...] Another post on the Visa ipo. A good post on the Tim Horton’s mania. [...]

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