Ladenburg Thalmann has initiated coverage of Monotype Imaging Holdings Inc. TYPE with a Buy rating and $29 price target, citing strong cash flow, potential upside in mobile messaging and recovery in OEM unit.
Woburn, Massachusetts-based Monotype Imaging develops fonts for various industries. The company's OEM segment provides font and font rendering technology to printers, wearables, automobiles and other IoT devices, while the creative professional segment (CP) provides fonts for enterprises and advertisers.
Analyst Glenn Mattson is optimistic on the recovery of the OEM segment, which was hit by weak growth in printers. The company offset negative total printer volumes by emerging opportunities in automobiles and devices for the IoT.
"While we don't expect a rebound in 2016, there should, ultimately, be cyclical upswings as printers have a finite lifespan and need replacement. This expectation, along with growth drivers in devices, gives us confidence OEM will be a solid cash generator for years to come," Mattson wrote in a note.
Catalysts Moving Forward
The analyst noted that an industry shift to HTML5 underway should lead to better growth in the creative professional unit; its revenues have been growing at about a mid-teens percentage annually.
Mattson also highlighted the potential upside from mobile messaging. In February 2015, Monotype bought Swyft Media, a maker of emojis often used in messaging. Moreover, Facebook Inc FB's announcement to open its Messenger platform to businesses underscores the significance of this business and opportunity.
"Messaging — the number one activity performed on mobile phones — is a huge market that up to this point has been largely untapped by enterprises and advertisers looking to reach customers," Mattson elaborated.
A Few Figures
Mattson expects 2016 revenue can grow by 6.6 percent to $205 million and EPS of $1.10 and $1.24 in 2016 and 2017, respectively. Street expects EPS of $1.11 and $1.22 a share, respectively. The company's long-term revenue goal is $400 million by 2020.
On the margin front, Mattson sees 35.8 percent in full-year 2016 adjusted EBITDA margins, which is still down from 2015 results, "but trending up as the company exits the year."
The company has a strong balance sheet, as it ended first quarter 2016 with $95 million in cash and no debt. Monotype produced free cash flow of $1.18 per share in 2014 and $1.13 per share in 2015.
Looking Forward
Mattson sees the company generating a total of $2.83 in free cash per share over 2016 and 2017. The analyst projects Monotype to end 2017 with about $170 million in cash (assuming no acquisitions).
"Monotype's ultimate goal is for revenue of $400 million and EBITDA margins of 30 percent. That would produce about $120 million in EBITDA. While this is still likely at least 4–5 years out, we contend that there is significant potential beyond a simple bounce-back to more favorable valuations," Mattson added.
At the time of writing, shares of Monotype Imaging were up 2.02 percent at $23.99.
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