Is Consolidated Edison, Inc. 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 Consolidated Edison, (ED -1.77%) 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 Consolidated Edison'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 Consolidated Edison's key statistics:

Source: ED Total Return Price data by YCharts

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

Source: ED Return on Equity (TTM) data by YCharts

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

How we got here and where we're going
Things don't look good for ConEd in its second assessment -- the utility provider earned a mere two out of nine possible passing grades, a big drop from the five passing grades it picked up in last year's assessment. One major source of this weakness is ConEd's weak free cash flow, which has fallen far from its net income during the past several quarters as the company invests heavily in expansions, upgrades, and repairs. As a result, the company's dividend payouts are using far more money than is evidently sustainable under current free-cash-flow levels. Weakening equity-based metrics also contributed to some of ConEd's failing grades today. Can ConEd be able to recover from the damages caused by Hurricane Sandy on the U.S. East Coast? Let's dig a little deeper to find out.

Utility stocks have remained a reliable source of stable cash flow and steady dividend payouts through the tumult of the past decade, as people will always need electricity regardless of the country's economic conditions. However, there are signs that the old reliance is not enough today -- ConEd recently reported lower-than-expected revenue and earnings per share for the fourth quarter, the result of ongoing heavy capital deployment to repair damage from Hurricane Sandy. ConEd's management also expects earnings from ongoing operations to fall by 1% through mid-2014, which has raised skepticism about ConEd's future growth prospects. Through it all, the company continues an annual dividend yield of 4.5%, which ranks it among the highest-paying utilities, ahead of NextEra Energy, Duke Energy, and Dominion Resources:

ED Dividend Yield (TTM) data by YCharts

However, ConEd and other utilities should fear an increase in interest rates and bond yields, which will provide an attractive alternative to dividend stocks for investors who are already worried that utilities may be in for periods of difficulty as distributed solar power becomes more viable.

Fool contributor Bill Foote notes that ConEd recently persuaded the State of New York to freeze rates for two years, a proposal still subject to final approval from New York State Public Service Commission (NYSPSC). The proposal mandates approximately 9.3% return on equity, compared to an earlier proposal from the NYSPSC of 8.3% last year. ConEd also recently announced a four-year, $12 billion capital expenditure plan to strengthen its presence in New York. According to Deutsche Bank, ConEd's partnership with the New York City Economic Development Corporation should also capitalize on increasing demand for energy-efficient solutions, which representa a $279 billion investment opportunity in the U.S.

ConEd joined with Sempra Energy (SRE -1.97%) a mere month ago to build five large-scale solar power plants in California and Nevada, representing a total 360 megawatts of generating capacity. The utility-scale solar farms, which will include Sempra's massive 250 megawatt Copper Mountain plant, should come online by the end of 2015. Fool contributor Justin Loiseau points out that ConEd and Sempra Energy each hold a 50% stake in each plant, diversifying both the risk and the opportunity evenly.

Putting the pieces together
Today, Consolidated Edison has few 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.