Tim Hortons (THI)

Lets look at Tim Hortons (THI) today. THI trades on the TSX and the NYSE. For discussion and to determine the entry and exit points. Using P/E and CF/S
By using the historical P/E ratio and CF/S ratio one can determine what the entry and exit positions should be and I’ll look at the dividend ratio (D/S) for this company.

THI is a public company that provides a range of food and beverage products. So here we go: for the past 3 years THI has had an average P/E trading range of 18.57 (high) and 14.27 (low). Over a longer term THI had an average P/E ratio of 22.52(high) and 16.83(low) over the past 6 years. THI has also had some wild swings in the past, for example P/E values in 2010 THI had a high P/E ratio of 11.80 and a low P/E ratio 8.5. With a current P\E of 23.03 it looks like THI is on the top end of the price range. THI has over time had an average annual Earnings growth of 22.31% over the past 6 years. For the purposes of this analysis I am using the average of a 20% increase to determine what THI should be valued at.

Knowing or at least estimating future earnings you can estimate the share price. In this case THI should earn about $2.82 in 2012 and using the average P/E the estimated trading range should be 52.36 (high) and 40.23 (low).

THI is a dividend payer which it started paying in 2006. Over that time THI has increased its dividend by 25.01% annually. Lets hope that the increases continue in fact THI has already increased its dividend in the first quarter of 2012 to $0.21 from $0.17, that is a increase of 23.5%.
THI dividend yield for the past 3 years range from 1.20 (high) to 1.58 (low). The past 6 years THI had a yield range of 0.91 (high) to 1.22 (low) Currently THI is paying a 1.50% based on its current price $54.35 which is above its historical average. It is estimated that THI will increase its dividend to $0.84 per share in 2012.

Looking at the math for the dividends and working it backwards the dividend would support a share price of $69.91 (high) and 53.12 (low)
Which makes the current price, look like an attractive buy.

Looking at the price per cash flow ratio (P/CF). THI has increased it’s average CF/S by 13.36% over the past 6 years. THI’s 6 year P/CF ratio is 17.55 (high) and 13.09(low) however the three year average gives a different picture. The current 3 year average is a much lower ratio at 14.24 (high) and 10.92(low). Could this be a sign that THI is maturing in it’s current market?
This gives THI a share price based on a cash flow of $50.04 (high) and $38.37 (low). With todays close of $54.35 it appears to be over valued at this price. CF/S for 2012 is estimated to be $3.51 per share.

To sum it up: current price $54.35
P/E over top of the price range $52.36
D/S is near its low Price range $53.12
CF/S is above its estimated price range $50.04

Now on to, how to trade, as I’m looking to purchase shares of THI I would be writing a put near my price estimates. In this case I’m looking to write a Put Option at $35 on the www.cboe.com and I am looking to sell 10, Oct 2012 Put contracts for the 35 strike price with collecting the premium of $.40 /share. I’ll be collecting the premium of $400 before trading costs. If the share price falls to my price level, the Dividend rate would rise to 2.4%.
If your wondering on what the return would be? 35000 /400 = 1.14% at an annual rate of 2.28%