Get 40% Upside From The Best Coffee Stock You've Never Heard Of

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I never thought I'd get an investment idea from the movie "Wayne's World." I didn't at first. It took me about 20 years to realize it.

#-ad_banner-#A while ago, I was kibitzing with a money manager friend of mine about some of the names he was picking up. Tim Hortons (NYSE: THI ) , the Canadian coffee and doughnut shop chain, was at the top of his list. "Oh!" I said. "There was a scene there in 'Wayne's World.' " My friend smiled and corrected me: The scene I was thinking of was actually set at Stan Mikita's Doughnuts, a fictional shop based on Tim Hortons.

An iconic brand in Canada, the real Tim Hortons was founded in Ontario in 1964 by pro hockey star Tim Horton and a retired police officer, Ron Joyce. Sadly, Horton died in a car crash in 1974 -- before he could witness the chain's unlikely rise.

The company now boasts over 4,300 restaurants throughout Canada, the U.S. and the Middle East. The menu has stretched beyond doughnuts and coffee -- to specialty coffee drinks, teas, homestyle lunches and other baked goods. And the stock has satisfied return-hungry investors:

The stock has gained an average of better than 28% over the past five years. But can its climb continue?

While Tim Hortons is a major player in Canada, the company has barely scratched the surface in the U.S. At the end of last year, the chain only had 859 locations in the Lower 48, mostly in areas close to the Canadian border in New York, Michigan and Ohio. But that's about to change.

Tim Hortons is committed to adding 800 locations over the next four years. The company's plans for North America include a continued co-branded store initiative between Tim Hortons and ice cream seller Cold Stone Creamery, a privately held company. Currently, over 100 Tim Hortons locations in the U.S. are part of this co-branding venture. This is a clever and cost-efficient way to expand the company's footprint in the U.S.

Flickr/msvg
Tim Hortons now boasts over 4,300 restaurants throughout Canada, the U.S. and the Middle East and is committed to adding 800 locations over the next four years.

Internationally, the company will focus on the Gulf Cooperation Council area, which comprises Saudi Arabia and five of its smaller neighbors. The company plans to open 120 multi-format stores across the region over the next five years. Foreign investment is just starting to trickle into the Middle East, and Tim Hortons is targeting the most attractive area in the region.

Expansion plans like these are what investors like to see: well-articulated, intelligent and, above all, realistic.

This smart management is also reflected in the company's recent performance: Tim Hortons' five-year averages are some of the strongest I've seen. Annual revenue has grown at an average clip of 13%, to nearly $3 billion last year. Earnings per share ( EPS ) grew from $1.57 to $2.82 for the same period, an annual average of 16%, and a 14% increase is expected for 2014, to $3.22 a share. The company also boasts a five-year average return on equity of a very strong 36%.

My favorite part of the Tim Hortons story is the dividend. Over the past eight years, the company's quarterly dividend has climbed an average of 40% annually from $0.07 a share in 2006 to the current quarterly dividend of $0.295 a share. That's a testament to the company's focus on execution.

Risks to Consider: The biggest risk is a potential failure to execute. The U.S. fast food segment is an extremely crowded field, and Tim Hortons has a lot of real estate to cover to strengthen its brand.

Action to Take --> Regular readers know I'm a value guy, through and through. Writing about a genuine growth stock is a bit out of my wheelhouse -- but THI is more of a "growth at a reasonable price" (GARP) stock. Tim Hortons currently trades near $54.50 with a forward price-to-earnings (P/E) ratio of 17 and a forward annual dividend yield of 2.1%. Based on the company's consistent operating history and mid-teens growth numbers, a 12- to 18-month price target of $75 is attainable; including dividends, that would amount to a total return approaching 40%.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

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This article appears in: Investing , Investing Ideas , Stocks

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