CAPScall of the Week: Monotype Imaging

For years, satirical late-night-TV host Stephen Colbert has been running a series on his show called "Better Know a District," which highlights one of the 435 U.S. congressional districts and its representative. While I am no Stephen Colbert, I am brutally inquisitive when it comes to the 5,000-plus listed companies on the U.S. stock exchanges.

That's why I've made it a weekly tradition to examine one seldom-followed company within the Motley Fool CAPS database, and make a CAPScall of outperform or underperform on that company.

For this week's round of "Better Know a Stock," I'm taking a closer look at Monotype Imaging Holdings (NASDAQ: TYPE  ) .

What Monotype Imaging does
Monotype Imaging develops text imaging software for enterprises in order to streamline customer use of devices such as laser printers, digital copiers, automotive touch screens, mobile phones, and tablets. The company, through original equipment manufacturer contracts supplies print drivers and color imaging technologies.

In Monotype's most recent quarter, the company recorded a 24% pop in revenue as operating income jumped 30% over the year-ago period. According to President and CEO Doug Shaw, "We had a strong third quarter, with continued momentum in our Creative Professional and OEM businesses, highlighted by innovations that support the three fundamental aspects of our business -- our typefaces, technology and expertise." 

What it competes against
In terms of competitors, Monotype shareholders should have two concerns: Adobe Systems (NASDAQ: ADBE  ) and the economy as a whole.

Although there may be some light competition elsewhere, Adobe Systems offers the most direct comparison to Monotype's text imaging software with its Acrobat PDF solutions. Adobe is a trusted name in software, although the company's recent focus on its Creative Cloud enterprise software could cause it to lose focus on its text imaging software.  

The other issue that creeps into the back of all investors' minds is the health of the global economy. Monotype counts numerous multinational corporations as customers, including Starbucks (NASDAQ: SBUX  ) , and MasterCard (NYSE: MA  ) , but is also exposed to OEM order slowdowns from Hewlett-Packard (NYSE: HPQ  ) and Microsoft (NASDAQ: MSFT  ) . The simple uncertainty surrounding fiscal cliff talks, the added costs to corporations for health-care coverage, and a slowdown in growth in debt-riddled Europe and in China have given every Monotype shareholders a reason to be cautious.

The call
After carefully reviewing the prospects for Monotype Imaging, I've decided to make a CAPScall of outperform on the company.

Despite the potential that a slowdown in Europe and Asia could put a small dent in OEM print driver and print technology embeds, those revenue streams are by far its most secure. In addition, as newer print technologies emerge, Monotype's Universal Font Scaling Technology, or UFST, looks like a lock to be a go-to embed for printing technologies, as it can combine Adobe's PostScript, and HP's PCL, while also supporting PDF documents and Microsoft XPS.

The second factor that makes me really excited about Monotype's future -- and trust me, I don't get excited very easily -- is the ease and scalability of its software. Monotype's recent purchase of Design By Front was small in scale, just $5.1 million in cash, but it gives Monotype access to Design by Front's Typecast application, which allows enterprise customers to compare and customize font and web designs side-by-side.

Finally, it's all about the money! Monotype's strong cash flow and rapid growth have allowed it to reverse a net debt position of $9.4 million in the previous quarter to a net cash position of $5.7 million. With its ability to forge OEM printer technology partnerships and really offer just about any type of web interface customization, I really don't see how Monotype won't grow by double-digits for at least the next three to five years. With that being said, I feel this is a bargain at just 14 times forward earnings (and paying out a 1% yield, to boot).

2013 and beyond
The Motley Fool's chief investment officer has selected his No. 1 stock for the next year. Find out which stock it is in our brand-new free report: "The Motley Fool's Top Stock for 2013." I invite you to take a copy, free for a limited time. Just click here to access the report and find out the name of this under-the-radar company.


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