Tim Hortons has been downgraded to a "sell" rating at Goldman Sachs over concerns that moderation in same-store sales could be a harbinger of more pressure in the hyper-competitive coffee market.
Its stock lost $1.15, or more than two per cent, Monday to close at $52.53 on the Toronto Stock Exchange.
A note from analyst Michael Kelter at the Wall Street investment firm says he is concerned about early indications of "impending Canadian saturation" that could reflect increased pressure.
"We see a five per cent downside in Tim Hortons shares versus a seven per cent average upside across the sector," he wrote.
He also expects the company might report a miss on same-store sales when it reports second-quarter earnings next month.
Earnings per share estimates were reduced to $2.72 from $2.77 for 2012, he said. Other reductions were made for 2013, with EPS down to $3.06 from $3.13, and to $3.34 from $3.48 in 2014.
The Canadian coffee market has faced a growing number of new entrants, including an expansion by Seattle coffee chain Starbucks and low-priced coffee and specialty drinks at McDonalds.
Tim Hortons has responded by expanding its menu to include a broader array of lunch offerings, including hot food, and new specialty drinks like frozen lemonade.
"Tim Hortons derives over 95 per cent of its operating profit in Canada, and growth into new geographies is coming at a somewhat moderate pace," he wrote.
Kelter said he would consider re-evaluating his rating if there were signs of a sustained rebound in Canada, or if Tim Hortons escalated the timeline of its rollout in other countries.
"There is the potential for a step up in growth from other areas that could serve to offset the more moderate Canadian trajectory," he said.
"These include single serve (or K-Cups), an area that Tim Hortons does not participate in today, but could turn out to be meaningfully accretive in the future."