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Is McDonald's About to Be Supersized or Sent to the Dollar Menu?

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Shares of McDonald's (NYSE: MCD  ) hit a 52-week low on Friday. Let's take a look at how it got there and see if cloudy skies are still in the forecast.

How it got here
Late last year, with the company trading near $100 per share, I made the very unpopular call that I'd be betting against McDonald's in 2012 in my CAPS portfolio. That move has actually turned out to be quite prescient due to a number of reasons.

First and foremost, Europe is causing McDonald's all kinds of problems. The regions' ongoing debt crisis is reducing consumer spending and a faltering euro currency is hurting McDonald's bottom line when it translates that revenue back into U.S. dollars.

Food inflation has also become a serious concern that is hitting not only McDonald's, but multiple other fast-food and casual-dining restaurants. Chipotle Mexican Grill (NYSE: CMG  ) has cautioned investors in two consecutive quarters that a decrease in customer traffic and food inflation are hampering results. Chiptole's recent guidance called for flat to low-single-digit same-store sales growth in the near term as compared to the high single digits that investors have been accustomed to.

Finally, competition among McDonald's peers is getting fiercer. Burger King Worldwide (NYSE: BKW  ) has taken an aggressive advertising approach in the U.S. in an attempt to recapture market share and regain the No. 2 spot in terms of fast food sales that it ceded to Wendy's recently. Similarly, Jack in the Box (Nasdaq: JACK  ) has followed McDonald's lead and spent untold millions redesigning the inside of its restaurants and broadening its menu. Even Starbucks (Nasdaq: SBUX  ) has gotten into the act by expanding its food offerings and utilizing its healthier food options to draw more health-conscious consumers into its stores.

Not surprisingly, McDonald's reported a same-store sales decline of 1.8% in October, its first such decline since April 2003, and the icing on the cake of why it's tipping the scale at a new 52-week low.

How it can turn its frown upside down
Step one for McDonald's to reverse its fortunes is to stick to its game plan. McDonald's is an innovator that's almost always at the front of the pack when it comes to introducing a new product or unveiling a new restaurant design. McDonald's has been offering a diverse choice of healthier food options and a wide array of price points to consumers for a long time, and it's this same set of choices and value that'll put it out of its current slump.

McDonald's is also going to need a little external help from Europe and the euro. As I mentioned previously, it isn't the only company being hurt by foreign currency translation, but until the euro shows sign of life and spending stabilizes in the eurozone, McDonald's growth is going to take a hit. As a sidebar to that, McDonald's can alleviate some of its growth problems by focusing on Asia even more than it already is, since that appears to be the only region still growing at a decent rate.

What's next
Now for the $64,000 question: What's next for McDonald's? That's going to depend on its ability to coax customers into purchasing higher-margin menu items, whether European spending stabilizes, and how much of a negative effect competition has on McDonald's bottom line.

Our very own CAPS community gives the company a highly coveted five-star rating, with a whopping 95.3% of members expecting it to outperform. As of right now I am the lone CAPScall of underperform among Wall Street trackers and am currently positive by 17 points on that selection.

I'm getting closer to closing my year-long underperform CAPScall on McDonald's, but I'm not quite there yet. Following McDonald's first same-store sales decline in more than nine years, I have a strong suspicion that its results may get worse before they get better. European Central Bank President Mario Draghi's recent proclamation that the EU may be in worse shape than originally feared is enough to send shivers down any multinational company's spine, and is all the more reason why McDonald's could be headed even lower in the interim.

Do McDonald's fortunes rest with its menu choices or are external factors like the EU and food inflation in the driver's seat? Find out the answer to this question and much more by getting your copy of our latest premium research report on McDonald's. Packed with in-depth analysis on the opportunities and threats facing McDonald's -- and complete with a year of regular updates -- this report will give you the tools needed to make smart long-term investing decisions.

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