When looking for information on solid investments, individuals and institutions alike turn to Morningstar (MORN) to find quality research. Many, however, may be unaware that a high quality is right under their nose in the form of the holding company that supplies them with the research. Morningstar is known to most as the primary aggregator of information on publicly traded mutual funds. The company’s ability to rank funds based on returns, expense ratios, style, volatility and many other measures has won them a loyal following. The company’s product line is actually much more robust with information on individual securities both in domestic markets and increasingly covering international markets.
The company has divided its revenues into three primary categories. The Individual Segment encompasses the well known mutual fund service served to consumers through the companies website. This segment received revenues of 23.7m last quarter primarily through premium membership subscriptions and advertisements sold on the site. The second division is the Advisor Segment which provides workstation technology and managed portfolios typically to independent wealth advisers. This segment accounted for 29.3m in revenues last quarter and benefited from strong growth in the number of licenses in use. Finally, the Institutional segment covers investment consulting, retirement advice and more. This is the crown jewel of the company with revenue of $60.8m in the last quarter. With improving margins, the segment saw operating income more than double at $20.7m.
The most recent strength in margins across all divisions is nearly as important as the sales growth. The company has managed to scale its platform effectively to be able to offer services to more customers with relatively small increases in overhead expenses. Acquisitions have been integrated in such a way as to wring out excess costs thus leaving the company with a robust product suite powered by a stable contained back office. The institutional segment is considered to have just scratched the surface of the multi-trillion dollar addressable market and could see significant further growth with only modest increases in its cost structure.
While the company is known for its expertise in domestic mutual funds, international expansion has grown to the point it is now more than 20% of revenue. The potential to serve emerging markets is incredible as investors are craving strong quality research products in this under-served area. Currently the company has a presence in 21 different international markets spanning North America, Europe and Asia. The diversification away from dollar denominated revenue also helps to stabilize earnings and has most recently led to additional gains on currency translation.
The stock has taken its share of lumps along with most other growth stocks in January. Currently the price sits just above the 200 day average which has proven to be a support area for the stock in the past. Volume flow is positive with several strong price movements in above average volume the last few weeks. While the stock is not cheap, the multiple has shrunk considerably since the high and now seems very reasonable given the potential growth rate of the company. The company has a very strong balance sheet with no debt to speak of and ample cash to fund further acquisitions. While cash flow will be pressured a bit as the company develops its Chicago headquarters this year, it is comforting to know that a liquidity crisis would not have a material effect on the company’s ability to finance future growth.
Bear markets are especially difficult for long only managers who are required to keep a certain amount of exposure in the markets. While I currently believe it is wiser to hold large cash balances and look for opportunistic short trades, this name may be very helpful for those who need to put some capital to work. With its talented management team, successful integration track record, low financial leverage and strong balance sheet, Morningstar should outperform its peers and possibly distinguish itself as a safe haven in a troubling market.
FD: Author does not have a position in MORN
Additional Reading:
Morningstar (MORN) – Poised for Growth
February 9th, 2008 at 1:40 pm
CMG street high estimates for ‘08 are S&P’s $3.05 with same store sales midpoint of 5% this recently lowered from $3.20 and 6.5% midpoint. the PE ration would be 1/3 what invstors paid for A shares in October for 007 earnings. 1/3? am i missing something.
February 9th, 2008 at 1:53 pm
Did you know that for thursday 2/7/08 the CMG B shares traded down to a 9 month low and were priced in the 83s about as low as when you first did the Blog post back in JUNE 2007!! they also traded down to the mid August low point even though oh micky oh micky your so fine you blow my mind MCDONALDS is much high then those idientically timed low points.
February 9th, 2008 at 4:46 pm
Zach,
In terms of MORN’s institutional segment (their money-maker), you mentioned that they are just scratching the surface. What do you mean by that? Do you have any more information about the growth in this particular segment of their business? Thanks.
–Doug
http://www.tomorrowsnewspaper.blogspot.com
February 10th, 2008 at 8:17 pm
Boris – It certainly seems the B shares offer more value than the A shares. I’m hesitant to enter the name from the long side at this time but I think you have much less risk taking the position you are in than the more traditional CMG.
Doug, – I was intrigued reading a research piece from WR Hambrich which notes that while the institutional division covers 91.4 billion, the addressable market for this division is in the multi trillion dollar level. Assuming just 10% market share on 2 trillion would more than double the segment. The division has already double year over year and was up 12% sequentially in the third quarter. Look for management to shed more light on this area in conjunction with the annual report in the next month.
Thanks both of you for your comments!
February 11th, 2008 at 7:02 pm
Zach, the CMG “B” shares are back to where you recommended them in June. since then 2 blow out quarters. why have you changed your mind? is this now an oridnary restuarant/retail chain? you seeing emerging competition in Atlanta thats going to chew into CMG margins? CMG no longer monopolisticly positioned? high growth rates about to be derailed?
February 12th, 2008 at 10:27 am
Boris – I think my picture of the US consumer continues to soften. There was a chance to make money in this name last summer, but as the market becomes more risk averse it will place a lower multiple on even strong growth names. It seems that it wouldn’t be out of the question for a fearful market to take a dimmer view of a retail food store (however healthy it may be) and price it at 20 times next years earnings. This would be a huge drop for CMG. I’m not saying this will happen but I am saying that the systemic risk in the market right now warrants more caution than the environment we were dealing with mid-year last year.
Hope this helps,
ZDS
February 12th, 2008 at 11:52 am
thankyou. i agree and/or get you perspective. but it looks like you are making little or no exception for potentially choosen companies like Chipotles.
February 12th, 2008 at 2:11 pm
chipotle if you think the PE ratio should be set all the way down to 20x, which would set the short term 24 month PEG possibly as low as .400 then you no longer believe this is a ” well oiled growth machine”. also at B shares low point of 83s last week the PE ratio may have approached 20.00x.
February 12th, 2008 at 10:08 pm
Boris – I think you misunderstand me. I am not saying that I think the valuation for CMG “should” be at 20, but in this type of market good companies can be punished alongside their poor brothers. CMG has a high multiple – they likely have a target on their backs. On days when the market is selling off and margin calls come in, those who are leveraged will sell anything and everything – especially anything that has a high price tag. So quality or no quality, this name is vulnerable. We are in a different environment than we were last year.