Friday, October 27, 2006

Calls of Note Part 3

- Goldman Sachs is adding Tim Hortons (NYSE:THI) to Americas Conviction Buy List.

Firm notes that on July 17 they downgraded Tim Hortons to Neutral on concerns of overhang from the completion of the Wendy's spin - not fundamentals. With the passing of this event, they are adding Tim Hortons to the Americas Buy/Conviction Buy List and see 3 catalysts to drive shares to $34 price target. Central to this is firm's view that starting in 4Q2006, sales strength should begin to show better flow-through to EPS with the abatement of various cost inhibitors, such as one-timers, IPO-related costs, and higher revenues, to offset costs from the Guelph distribution center. They expect 20% upside and for momentum to accelerate in the name near-term.

1) Continued SSS strength - Further pricing action in various markets (they estimate 1-2% lift) and the breakfast sandwich roll-out in Canada (they estimate another 2-3% lift) should maintain strong SSS momentum.

2) Expense confusion surrounding 3Q ends, 4Q starts anew - IPO-related expenses, one-timers and the delayed leverage from the Guelph distribution ramp clouded 3Q. GS expects that when 4Q results are reported, the underlying earnings power of the business will materialize.

3) Share repurchases - Tim Hortons' buyback program could ultimately be $0.03-$0.04 accretive to EPS in 2007.

Notablecalls: Actionable call alert! I think THI will see some buy interest today.

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