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 Universal Display (NASDAQ:OLED) fit the bill? Let's 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 Universal Display'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 look at Universal Display's key statistics:

OLED Total Return Price Chart

OLED Total Return Price data by YCharts

Passing Criteria

3-Year* Change

Grade

Revenue growth > 30%

362.6%

Pass

Improving profit margin

114.3%

Pass

Free cash flow growth > Net income growth

(897.2%) vs. 166.1%

Fail

Improving EPS

152.3%

Pass

Stock growth (+ 15%) < EPS growth

101.7% vs. 152.3%

Pass

Source: YCharts.
*Period begins at end of Q2 2010.

OLED Return on Equity Chart

OLED Return on Equity data by YCharts

Passing Criteria

3-Year* Change

Grade

Improving return on equity

159.8%

Pass

Declining debt to equity

No debt

Pass

Source: YCharts.
*Period begins at end of Q2 2010.

How we got here and where we're going
Universal Display puts together a strong performance, missing out on a perfect score only because of a collapse in free cash flow that's yet to be reversed. The company's share price has been extremely volatile due to various factors, one of which is certainly related to free cash flow -- you can see both share price and free cash flow fall in tandem in mid-2012. Will Universal Display be able to move past this weakness around and rebound, or is the display manufacturer going to fade to black? Let's dig a little deeper to see what the future may hold

Universal Display is poised to capitalize on the upcoming worldwide launch of Samsung's smart watch, Galaxy Gear, which offers seamless integration with Samsung's smartphones. Universal Display has exclusive agreements to supply AMOLED screens for all Samsung electronics devices, which was worth about $20 million this quarter, a 33% year-over-year increase. Fool contributor Steve Symington points out that Apple (NASDAQ:AAPL) has decided not to employ OLED technology in its own devices for the time being. However, it appears that Apple does have plans for launching a smart watch, as it filed a patent for a flexible AMOLED wrist-worn display in the first quarter of fiscal 2013.

Qualcomm (NASDAQ:QCOM) is also getting on board the wrist-worn bandwagon with the launch of its own smart watch, Toq. This is built with Qualcomm's proprietary Mirasol touchscreen display, which could crowd out Universal Display if the chip-maker's deep client base decides to stay with an old ally. Moreover, Universal Display will also be looking to leverage the recent OLED-TV trend, as LG Display (NYSE:LPL) has recently launched large-screen OLED televisions at selected Best Buy stores. Samsung also unveiled an OLED television at a price of $13,500, which is cheaper than LG's OLED offerings. "Cheaper," of course, is certainly relative -- it's going to be a while before this new technology catches on, and it's got to come down in price quite a bit first.

Fool contributor Steve Symington notes that Samsung and LG Display have both been ramping up their production efforts to reduce prices for their curved OLED TVs, a necessary step toward properly leveraging economies of scale. According to the Korea Times, Google has also agreed to utilize high-end OLED screens in its Google Glass offerings. There are a number of opportunities just over the horizon for Universal Display, but much will hinge on its technology becoming cost-competitive with existing options.

Putting the pieces together
Today, Universal Display has many 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.

Fool contributor Alex Planes has no position in any stocks mentioned. The Motley Fool recommends Apple, Google, and Universal Display and owns shares of Apple, Google, Qualcomm, and Universal Display. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.