Is McDonald's a good stock to buy?

Q: Is McDonald's a good stock to buy?

A: The golden arches aren't just a beacon of light for bleary-eyed drivers on summer road trips. McDonald's (MCD) is a stock that continues to deliver amid a choppy market and economy.

In many ways, McDonald's has become a perfect stock for a sluggish economic recovery. The company sells moderately priced meals that offer the convenience of a full-service restaurant, but are still within reach of working Americans. So while some squeezed consumers may be cutting back on more expensive restaurants, McDonald's is still affordable.

Meanwhile, McDonald's has been working to appeal to a more upscale audience. The company's lineup of beverages, including specialty coffee, is a draw for consumers who might not normally think to go to McDonald's. The company is also working to refresh its image by doing some serious remodeling of many locations across the country.

All these positive improvements aren't being lost on investors. Shares of McDonald's have rocketed from around $55 a share in late 2008 to $87.09. That's a solid 58% gain.

But if you haven't taken a bite of McDonald's stock yet, is it too late? To find out, let's put the stock through the four tests considered at Ask Matt, including:

Step 1: Risk vs. reward. When you take a risk on a stock, you want to make sure you're properly rewarded. Downloading McDonald's trading history back to 1970, we see the company generated an annual compound rate of return of 18.6%, including the current dividend yield of 2.4%. That's a very solid return if you consider the S&P 500 returned an annualized 9.9% return over the same period, says IFA.com.

But to get that better-than-average return, you had to take greater risk. You accepted risk — standard deviation — of 36 percentage points. So, by investing in McDonald's, you took on 131% more risk to get an 88% higher return. While McDonald's hasn't generated adequate excess return to justify the greater risk, the differential isn't as large as is the case with most stocks.

Step 2: Measure the stock's discounted cash flow. Some investors decide if a stock is pricey by comparing its current price to the present value of its expected cash flows. It's a complicated analysis made simple with a system from NewConstructs.

When we run McDonald's stock, we find it's rated "very attractive." In other words, the current stock price is well below the value of what the company is expected to generate in cash over its lifetime. NewConstructs charges for its reports, but a free McDonald's report is available to Ask Matt readers.

Step 3: Compare the stock's current valuation to its historical range. BetterInvesting's Stock Selection Guide can help. If the company can increase earnings 9% a year the next five years, that would put the stock in the "buy" range. This indicates the stock is inexpensive relative to the earnings the company is expected to generate.

VIDEO: Get a peek as the fast food giant undertakes its biggest-ever renovation.

Step 4: Check the company's financial health. Before investing in any company, you want to make sure it's in good financial shape. A quick way to check is to look at where it falls on the USA TODAY Stock Meter, which ranks stocks from conservative (1) to aggressive (5). McDonald's scores a respectable 1.8 here. You can get a Stock Meter score for almost any stock by going to money.usatoday.com and putting the stock's ticker symbol or company name into the Get a Quote box.

The bottom line: McDonald's is one of the few stocks that appear to have almost everything going for it. Given the sluggish economy, the company's offerings are well positioned for both struggling consumers and those looking to cut their dining-out costs. The company's successful launches of new beverages, including coffee, puts it on consumers' minds like never before. Furthermore, based on both a discounted cash flow and P-E analysis, the shares look attractive. If there's one nitpick, it's that the company's long-term returns don't warrant the risk. Even so, for investors looking to take a reasonable bet on a stock, that want more than just buying the market, might take a look at the golden arches.

Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies and Fundamental Analysis for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Follow Matt on Twitter at: twitter.com/mattkrantz