Is The Clorox Co. Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does The Clorox Co. (CLX -1.02%) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Clorox's story, and we'll be grading the quality of that story in several ways:

• Growth: Are profits, margins, and free cash flow all increasing?
• Valuation: Is share price growing in line with earnings per share?
• Opportunities: Is return on equity increasing while debt to equity declines?
• Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Clorox's key statistics:

CLX Total Return Price. Source: YCharts.

Source: YCharts. *Period begins at end of Q4 2010.

CLX Return on Equity (TTM). Source: YCharts.

Source: YCharts. *Period begins at end of Q4 2010.

How we got here and where we're going
Clorox is the rare stock that seems better-positioned in 2014 than it was last year, as the king of bleach earned four of nine possible passing grades, compared to its lousy one-of-nine score on the previous assessment. The company's free cash flow had been recovering since 2012, but it has once again started to collapse, undoing much of its progress and threatening the sustainability of its dividend, which amounted to more than two-thirds of its free cash flow last year. The biggest improvements have been on Clorox's equity metrics, which both passed this year as the company returned to positive equity levels. Will investors continue to enjoy safe and reliable dividend payouts at these high free-cash-flow payout levels, or will Clorox have to tighten the belt on its poor fundamentals soon? Let's dig a little deeper to see.

Clorox recently reported mixed third-quarter earnings results -- revenue topped Wall Street's expectations, but higher costs for commodities, manufacturing, logistics, and advertising combined to put the hurt on the bottom line. Clorox also lowered its full-year earnings guidance for fiscal 2014, which has left investors skeptical about its future growth potential. However, Clorox's management still expects free cash flow to amount to 10% of total sales, which should allow it to raise quarterly dividends as well as repurchase shares.

Clorox also recently acquired infection-control products for sales to hospitals and other large institutions, diversifying itself away from a completely consumer-dependent product lineup. Therefore the company clearly has avenues of growth that it can pursue. However, Fool contributor Rich Smith notes that Clorox's tepid outlook seems inadequate to justify its valuation, which at 20 times trailing earnings and 22 times free cash flow makes it already one of the higher-priced "value stocks" in the game.

Fool contributor Andres Cardenal points out that Clorox's commitment to rewarding investors with growing capital distributions has allowed it to outperform peers like Procter & Gamble, Johnson & Johnson, Colgate-Palmolive, and Kimberly Clark. Clorox now leads all these peers in terms of yield.

CLX Dividend Yield (TTM). Source: YCharts.

But that may be because it's underperformed all but one of its rivals in terms of actual investment appreciation:

CLX Total Return Price. Source: YCharts.

Going forward, Clorox should continue to benefit from better-than-expected economic growth in the U.S. Recently, the Commerce Department reported a 0.4% uptick in household purchases, which equate to 70% of the economy. Fool contributor Jessica Alling also notes that Clorox has been trying to develop a rather unique app called Sock-It, which allows users to broadcast an alert requesting privacy to others nearby in a manner reminiscent of the old college dorm room sock-on-the-doorknob signal. This isn't what I would call a smart social strategy for a household cleaning product, but maybe this is what Clorox needs to get its name out among young persons with embarrassing stains to get rid of.

Putting the pieces together
Today, Clorox has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.