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Davidson Kempner Capital opens new positions 3Q 2013

Part 3
Davidson Kempner Capital opens new positions 3Q 2013 (Part 3 of 6)

Davidson Kempner Capital opens new positions in WWAV, CBS, MCD and sells LBTYK, NVE, FDX—13F Flash C

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Davidson Kempner Capital Management LLC is an event-driven hedge fund manager led by president Thomas Kempner, Jr., who joined the firm in 1984. The firm was originally founded in May 1983 by Marvin H. Davidson as M.H. Davidson & Co. In 1990, current principals Kempner and Scott Davidson renamed the firm Davidson Kempner Capital Management. It has about $21 billion in assets under management.

Abbreviated financial summaries and metrics for these securities are included below. Detailed analysis and recommendations require a subscription (more information at the bottom of the article).

The fund started new positions in Whitewave Foods Co. (WWAV), CBS Corp. (CBS), and McDonald’s Corp. (MCD) and it sold Liberty Global PLC (LBTYK), NV Energy Inc. (NVE), and FedEx Corp (FDX).

Why buy McDonald’s Corp. (MCD)?

McDonald’s Corp. reported 3Q 2013 earnings that beat analyst estimates at $1.52 per share, up 6% compared to the same period last year. Revenue was up 2%, at $7.32 billion from last year, but it missed analyst estimates. U.S. comparable sales increased 0.7%, and Europe comparable sales rose 0.2%, but Asia Pacific, Middle East, and Africa (APMEA) sales declined 1.4% for the quarter. The company attributed the decline to the ongoing challenging environment.

For the fourth quarter, MCD expects global comparable sales performance to be in line with recent quarterly trends, while restaurant margin percentages are expected to decline at a level relatively similar to first quarter results. The company saw shares decline recently after it issued a press release that stated its global comparable sales increased 0.5% in November. U.S. comparable sales decreased 0.8% due to ongoing competitive activity and relatively flat industry traffic trends negatively impacting performance. Looking ahead to 2014, it’s intent on rebuilding its underlying business momentum by strengthening key elements of customer service and leveraging the breadth of menu choices across all day parts and value tiers. In Europe, comparable sales increased 1.9%, while sales in APMEA declined 2.3% due primarily to negative results in Japan.

In a retailing conference in September, McDonald’s said it’s facing challenges, as economies around the world are recovering slowly, with global unemployment at its highest level in three years and GDP growth at its lowest levels since 2009. Overall economic uncertainty continues to dampen consumer spending. So growth in the informal eating-out industry is expected to remain sluggish.

On its investor day in November, MCD management reiterated the company’s commitment to its strategic plan and its global growth priorities of optimizing its menu, modernizing its customer experience, and broadening accessibility to the brand McDonald’s. It expects system-wide sales growth of 3% to 5% and operating income growth of 6% to 7% for the long term. Return on incremental invested capital is likely to be in the high teens in the long term. MCD’s competitors include Yum Brands ((YUM), Wendy’s (WEN), Buffalo Wild Wings (BWLD), and Chipotle (CMG). These chains saw workers go on strike last week, demanding a minimum wage increase from the current $9 hourly to $15 an hour.

Davidson Kempner Capital opens new positions in WWAV, CBS, MCD and sells LBTYK, NVE, FDX—13F Flash CEnlarge Graph

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Davidson Kempner Capital provides its services to pooled investment vehicles. The firm invests in distressed debt and stocks of companies that are undergoing corporate restructuring, including mergers, spinoffs, liquidations, and recapitalizations. It also uses event-driven strategies, including merger arbitrage, long/short, and convertible arbitrage. The firm employs a fundamental analysis with a bottom-up approach.

Thomas Kempner, Jr., attended Yale University and the Harvard Business School. After graduating, he joined Goldman Sachs in 1978 as a bond trader. After a few years, he left and joined First City Capital. Kempner specializes in risk arbitrage.

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