Is Now Right Time to Buy McDonalds?

Source: McDonald's

McDonald's stock has languished in the last year, mostly because sales are declining as consumers move toward fast-casual competitors offering higher quality, healthier products. But the company's problems are widely known at this stage with no surprises, and McDonald's looks attractively valued from the perspective of dividend investors. So does McDonald's present a buying opportunity for investors today?

The problem McDonald's reported an 8% decline in systemwide sales during February. Currency headwinds were a major drag during the month, however, systemwide sales measured in constant currency still grew by an uninspiring 0.5%. Meanwhile, comparable sales declined 1.7% versus February 2014.

February was not the exception to the rule, either. McDonald's suffered declining sales through the all of 2014. Global comparable sales declined 1% last year, while total revenues declined 2% year over year.

Changing eating trends are driving McDonald's poor performance. Consumers are clearly more inclined toward fast-casual players offering a healthier menu made with fresher ingredients, even if they have to pay a few extra bucks in exchange. Chipotle Mexican Grill is the poster child for the fast casual revolution and has the sales growth to prove it. The organic burrito maker delivered a mouthwatering sales increase of 27.8% during 2014.

Smaller players such as Shake Shack are also proving that customers are more than willing to pay up if that means better tasting products made with fresher ingredients. Shake Shack recently announced a massive sales increase of 43% for 2014 on the back of a 4.1% increase in same store sales during the year.

In response to the competition, McDonald's is implementing menu innovations, but the strategy seems to be backfiring. According to The Wall Street Journal, there are currently 121 different items on the company's menu, a big increase versus 87 items seven years ago. An enlarged menu means increased complexity at the kitchen, and this is hurting both service speed and quality.

In a move that seems to emulate Chipotle's playbook, McDonald's has recently announced that it will stop selling chicken treated with some antibiotics, and management is working on making the menu simpler and more customizable. But while these ideas seem well-intended, they could also mean higher costs and additional problems in the kitchen.

The opportunity for investorsDespite some major problems, McDonald's stock is certainly worth watching, as it offers substantial room for gains if management can turn things around.

Geographic reach and location are crucial competitive advantages in the industry, andMcDonald's is a global juggernaut with more than 36,000 restaurants in the most coveted locations around the planet. Its massive scale provides considerable bargaining power with suppliers, and the company has loads of money to invest in areas such as marketing and advertising.

More than 80% of stores are franchised, which provides consistent cash flows for the company with minimal capital requirements. Even during a challenging year such as 2014, McDonald's produced $6.73 billion in operating cash flows and $4.15 billion in free cash flows. Dividends absorbed only $3.2 billion from that money, so the company has more than enough resources to sustain dividend growth.

Sure,McDonald's could easily appeal to investors since it's trading at a tasty valuation and pays a dividend yield of 3.5%. But Foolish investors should keep in mind that management has not proven that it has a viable and consistent strategy to turn sales around just yet. If that happens, the company is well-positioned to gain market share and leverage its strengths. In the meantime, however, investors may want to be patient when eyeing a position in the company.

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Andrs Cardenal has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill and McDonald's. The Motley Fool owns shares of Chipotle Mexican Grill. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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