Sunday, June 3, 2012

In todays discussion lets compare McDonalds (MCD) to Tim Hortins (THI). Both companies are in the food business, selling very well known products. MCD is a global leader and player, where as THI is a much smaller company with the majority of their operations in Canada and currently only a few stores in the US. When comparing the maximum number of their target consumers it’s very clear that MCD is the clear winner with nearly 6 billion people to serve vs. THI’s less than 40m potential customer base. THI has only been a publicly traded company since 2004 so the historical data is very short, unlike MCD which has been publicly trade for decades.

Now onto the numbers, I’m sure that most people love this part. Starting with THI’s earnings, THI’s has been growing it’s earnings at a growth company rate of 22.31% annually for the past 8 years. It is estimated that THI will maintain that growth going forward by 20% in 2012.

THI’s P/E range, over the past 6 years has had an average range of 22.52 (high) and 16.83 (low). With the past 3years being 18.57 (High) and 14.27 (low) much lower then what is expected and this is a clear indicator that THI has matured from a growth company at a very quick pace. It would seem that THI would need to either grow the number of stores available at a cost to the bottom line (short term) or remain in it’s current maturing state and hoping that a competitor doesn’t enter the market and remove THI’s consumer base. The math to the share price based on the P/E works out as $52.36 (high) and $40.23 (low) and with Fridays close of $53.55 THI is still ahead of its self on the share price.

If we compare THI’s CF/S is a better indicator to determine what the share price should be. So looking at the CF/S growth rate of 13.36% over the past 6 years, it is estimated that THI will maintain a CF/S growth rate of 13% for 2012. Comparing the P/CF ratio, THI’s 6 year range of 17.55 (high) and 13.09 (low) and the 3 year average THI has a range of 14.24(high) and 10.92 (low). Using the three year average we can calculate the share price based on CF/S and its share price range. The estimated share price range for 2012 worked out to $50.04 (high) and $38.37 (low) . Again THI is showing that it’s over priced based on Fridays close of $53.55 and is off its 52 week high of $57.91.

Comparing the two price ranges between the P/E and the P/CF ratio’s the buy price for THI is between $38 and $40 dollars and the sell price is between $50 and $52 dollars.

Now on to McDonalds (MCD), we’ll first look at its earnings growth. MCD’s earnings growth over a 16 year period has averaged 15.81% with the past 3 year average of 11.94%.
For this review we’ll be assuming an earnings growth of 11.9% for 2012.

MCD’s P/E range, over the past 16 years has had an average range of 19.84 (high) and 14.31 (low) with the past 4 years being 17.6 (High) and 12.87 (low). The math to the share price based on the P/E works out as $103.80 (high) and $75.88 (low), with Fridays close of $86.71 MCD is priced near the mid range.

If we compare MCD’s CF/S which is a better indicator as to where the share price should be. So looking at the CF/S growth rate of 12.08% over the past 18 years and 10.96% over the past 3 years, it is estimated that MCD will maintain a CF/S growth rate of 10% for 2012. When comparing the P/CF ratio, MCD has a 19 year range of 15.47 (high) and 10.6 (low) and for the 4 year average of 13.55(high) and 9.91 (low). Using the four year average we can calculate the share price based on CF/S and its share price range, the estimated share price range for 2012 worked out to $100.91 (high) and $73.87 (low) . Again MCD is showing that its shares are priced near the mid range and based on Fridays close of $86.71 it is well off its 52 week high of $102.22.

Comparing the two price ranges between the P/E and the P/CF ratio’s the buy price for MCD is between $73.87 and $75.88 dollars and the sell price is between $100.91 and $103.80 dollars.

Last point to look at is the yield on the dividend if you purchase the stock at these prices. For THI you’ll get the current dividend of $0.84, from that you’ll get a yield of 2.15% with a share price of $39.

For MCD you’ll get the current dividend of $2.80, from that you’ll get a yield of 3.74% with a share price of $74.88.

For me I would be looking at McDonalds as the better company.

See my earlier notes for the option trades on these two companies.