Instead of the usual book review, I will apply what I learned from reading Joel Greenblatt’s You Can Be A Stock Market Genius to everybody’s new favorite IPO: Tim Hortons (THI).

After the IPO was announced in July 2005, like most everyone on the planet, all I could think about was whether I should buy Tim Hortons stock.  Not once, however, did I seriously consider the value unlocked in Wendy’s (WEN) stock.  Thanks to Greenblatt, I will know next time.




Wendy’s International is primarily engaged in the business of operating, developing, and franchising fast-food restaurants.  These include Wendy’s restaurants, Tim Hortons, Baja Fresh, and Café Express.

The company's July 2005 8-K filing announced many significant items:

• Plans to sell 15%-18% of Tim Hortons in Initial Public Offering
• Board authorizes an additional $1 billion for share repurchase
• The Company plans to use the cash [from the IPO] primarily to repurchase common shares of its stock.
• At year-end 2004, Wendy’s owned 217 U.S. sites where it leases real estate to franchises.  The company intends to pursue the sale of this real estate to franchisees or third party investors, where feasible.

Looking at the 2004 proxy, operating earnings for Tim Horton’s was $247 million and Wendy’s $272 million.  Operating earnings, of course, is equal to income, before income taxes and interest.  If we subtract taxes and interest, assuming a total rate of 50%, Tim’s net income for 2004 was $124 million and Wendy’s $136 million.  What’s the correct P/E multiple?  Well Starbucks (SBUX) has a P/E of 55 and McDonalds (MCD) 17.  Now anybody who’s ever been at Tim Hortons in the morning will know from the lineups out the door that business is great – but it’s no Starbucks.  Neither is Wendy’s as popular as McDonalds.  So let’s be conservative and use 15 for Tim’s and 10 for Wendy’s.

	Earnings	P/E	Estimated Capitalization
Tim Hortons	$124 million	15	$1,860 million
Wendy’s	$136 million	10	$1,360 million
			$3,220 million

In July 2005, Wendy’s stock was selling at $45.  With 114 million shares outstanding, that’s a market capitalization of $5,130 million.  That leaves just $1,910 million ($5,130 - $3,220) for the Baja Fresh chain, Café Express chain, the goodwill and brand names, and all the real estate.  Did I say real estate?  Up above one of the items announced was that Wendy’s will attempt to sell 217 properties.  To me, that says they have real estate and want to make the public aware that they are willing to trade for cash.  Looking on the balance sheet, Wendy’s net fixed assets have been depreciated to $2,349 million.  Subtract $600 million in long-term debt and you have $1,749 million.

Some readers might be wondering if the real estate is really worth that much?  I found two important items from the properties section of the 10-K:

The restaurants are built to Company specifications as to exterior style and interior decor. The majority are free-standing, one-story brick buildings, substantially uniform in design and appearance, constructed on sites of approximately 40,000 square feet, with parking for approximately 45 cars. Some restaurants, located in downtown areas or shopping malls, are of a store-front type and vary according to available locations but generally retain the standard sign and interior decor.

At January 2, 2005, the Company and its franchisees operated 6,671 Wendy’s restaurants. Of the 1,487 company operated Wendy’s restaurants, the Company owned the land and building for 686 restaurants, owned the building and held long-term land leases for 542 restaurants and held leases covering land and building for 259 restaurants.

Now I’m no real estate expert, nor have I consulted one, but I’m going to assume the total land and building values for each of those 1,200 sites are worth at least $1.7 billion or the depreciated value on paper.  (Actually I’m lying.  I think they are worth a whole lot more!)

Tim Hortons earnings:         $1,860 million
Wendy’s earnings:             $1,360 million
Real Estate (minus debt):     $1,749 million
TOTAL:                        $4,969 million  

WEN July 2005 Market Cap:     $5,130 million

$5,130 - $4,969 =               $161 million 

Just $161 million left for the two other chains, the brand names, and the franchising system?  Hmmm….  Are you starting to get the picture?  The sum of the parts are worth much more than the stock market value.  After all, I was being overly conservative with the P/E multiples and real estate values. (Try recalculating with less conservative numbers.)

And if you believed any of the above estimates were too conservative, you would have known to buy Wendy’s stock.  But wait, there’s more!  The announcements also said that they would use the cash from selling Tim Hortons to repurchase $1 billion in shares.  If you believed that, $5 billion minus $1 billion leaves the market cap at $4 billion.  Either way you sliced it, Wendy’s looked cheap in July 2005.

On Friday Wendy’s stock closed at $62.93.  That’s a 40% increase from $45 on the July 2005 announcement date.  Even if you had taken your time to do research, you could still have bought the stock for the same price two months later in September 2005.

What about now?  There is no doubt the easy money has been made already.  But Tim Hortons closed Friday up 20% at a P/E of 27.60, which is significantly higher than our conservative estimates above.  Don’t forget Wendy’s still owns 80% of Tim Hortons.  


I’ll let you figure out the rest.