Tim Hortons is Overvalued

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”!