Thursday, May 31, 2012

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%