A cup of Tim Hortons (TSX:THI) coffee is as Canadian as a hockey stick, a dish of poutine, or a maple leaf. Ever since Canadian hockey player Tim Horton partnered with businessman Ron Joyce in 1967, the company has been on an upward trajectory eventually leading to more than 3,000 locations in Canada and the U.S.

While it has come a long way in terms of menu selection since its coffee and doughnut roots, more than 50% of the company’s sales consist of coffee. This isn’t necessarily a bad thing, since margins on coffee are pretty impressive.

Tim Hortons’ dominant position in the Canadian coffee market has attracted some competition. McDonald’s (NYSE:MCD) is moving into the coffee market in a big way, having recently revamped its hot drink selection in an attempt to draw coffee drinkers in the store. Consumers seem to be responding well to McDonald’s new McCafe beverages, which include espresso, cappuccino, and smoothies.

Starbucks (NASDAQ:SBUX) is continuing its expansion into Canada, with stores in almost every new Target store opened during last fall’s expansion. In total, Starbucks opened 150 new locations in the Canadian market in 2013, and it is already dominant in the U.S. northeast, Tim Hortons’ other big market. Starbucks is also beginning to get its food business right, as sales in baked goods are starting to take off.

Tim Hortons still has a huge moat. The quality of its coffee is second to none, it has a well established network of locations, and it’s always easier to keep an existing customer than to acquire a new one. Still, all is not rosy for the company.

The company isn’t cheap. It’s trading at over 21x trailing earnings, and almost 18x forward earnings. This multiple is higher than most of their peers and is higher than the overall market. Considering its increased competition, I’m not sure the expensive P/E ratio is justified. McDonald’s is the largest player in its market, and it’s only trading at 17x trailing earnings and less than 15x next year’s earnings.

Tim’s also pays a small dividend (1.8%) and is buying back its own shares — more than 3% of its outstanding shares during 2013. This is a signal that the company’s days of heavy expansion are behind it, since it’s not using the cash to open new stores.

Foolish bottom line

While Tim Hortons has a terrific brand and a strong moat, cracks are beginning to appear in its armor. The company is still largely focused on coffee sales, a market where it is seeing significant competition for the first time. There’s a store in every community of size in Canada, and the U.S. expansion has been a challenge. There are too many question marks for Tim Hortons to trade at this high of a multiple. I would avoid the stock.