McDonald's (NYSE: MCD)
 trading at $18.71 as of 10/24/02

There are few things scarier than owning McDonald's(NYSE: MCD) right now.... You know, like trying to figure out exactly what's in those Chicken McNuggets. But while the value investor in me might be tempted to see the fast food giant's stock trading at a seven-year low, the realist in me sees even more room to the downside.

The chain is in super-sized shambles. The world's largest restaurant operator is having a hard time maintaining sales, both here and abroad. In Japan, same-store sales fell by 11% last month. The fact that this dramatic shortfall came just two months after the company resorted to drastic price cuts to win back foot traffic is especially troublesome, considering it recently rolled out its cheaper buck menu stateside.

Cheap eats? Cheap stock? Nix the latter. 

Over the summer, Britain's Diageo PLC(NYSE: DEO) agreed to sell its Burger King chain for $2.26 billion. This is the world's second-largest restaurateur, and McDonald's market cap is a whopping 10 times greater than the winning bid on BK. That's steep, even before you begin to consider the additional $9 billion in debt Mickey D's is lugging around.

I realize that in patriotic times, it might almost seem un-American to flip McDonald's the McNugget. But since when is losing money, market share, and quality the American way? The thick margins and untapped areas are gone. Most of the company's eateries are now overseas, and the $0.99 menus at rivals Burger King and Wendy's(NYSE: WEN) keep the fat markups honest.

I am not going to argue that we're eating healthier, but our collective sense of taste and sensibility has transcended our narrowed arteries. Whatever we're craving, odds are it's not found under the Golden Arches. While anything from mad cow disease to a geographical boycott of deceptive vegetable oil advertising may sting the company abroad, McDonald's is failing on its own home turf, too.

New paint jobs and a dollar menu are not the answer. That's like putting your arm in a sling when you stub a toe. Recently, I offered 10 Tips to Save McDonald's, but maybe we're at the point where potential has gone skinny-dipping in the frying vat. Maybe we've upped our skepticism intake to the point where watching Donald Trump hawk buck burgers just isn't going to register.

History is kind to the turnaround story. But for that to happen, you need some form of catalyst to trigger the Renaissance. What is it? We know what lower selling prices mean in the tech industry, and it's not any more encouraging in the fast food space. A company such as Starbucks(Nasdaq: SBUX) or Krispy Kreme(NYSE: KKD) can charge a king's ransom for bean water and sugared dough because quality breeds a certain inelasticity in price. McDonald's is about to find out that you can't even give away mediocre grub.

Is the company going out of business? No. But that doesn't make the stock undervalued. Analysts just don't get it. McDonald's has posted lower operating profits every year since 1999, and Wall Street still thinks the company will bounce back with 8% in earnings growth next year.

Show me how? Show me where?

Over the last three years, it has added $3.5 billion in long-term debt, with little more than a Moody's credit downgrade last month to show for it. Shareholder equity has fallen over each of the last few years. If there's a silver lining behind those fabled yellow arches, Wall Street would have it bronzed. But there is nothing there. It's losing the home game. It's losing the away game.

McDonald's has played its trump card. For the near term, it's probably best to fold.

Rick Aristotle Munarriz thinks clowns wearing ketchup- and mustard-colored clothing are scary. While he still eats at McDonald's from time to time, it's far more infrequent lately, and he is neither long nor short the stock. Rick's stock holdings can be viewed online, as can the Fool's disclosure policy.

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