Anyone who invests on a regular basis is likely well aware of the role Morningstar (Nasdaq:MORN) plays in educating and informing investors. For 28 years it's been creating products to help investors reach their financial goals and for the most part they've been very successful. Founded by Joe Mansueto in 1984, Morningstar went public in May 2005 at $18 a share. At the time of the IPO, Mansueto owned 30 million shares or 78% of the company. Today, he owns 24.8 million shares or 49.5%. At age 55, the Chairman and CEO isn't going anywhere. Morningstar's stock is up more than 222% on a cumulative basis since its IPO. Although shares aren't cheap at the moment, I believe it's still worth buying. Here are three reasons why.
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Morningstar and Peers




Company


Cumulative Total Return

May 2, 2005 - June 27, 2012


Morningstar


222%


FactSet Research Systems (NYSE:FDS)


256%


Advent Software (Nasdaq:ADVS)


193%


Thomson Reuters (NYSE:TRI)


4.4%


McGraw-Hill (NYSE:MHP)


17.3%


S&P 500


14.6%








International Operations
When Morningstar IPO'd in 2005, the company had four growth strategies, which included expanding its international presence. International revenues in fiscal 2004 were $25.4 million. Flash forward to fiscal 2011 and expanding internationally is still one of its growth platforms. In 2011, international revenues were $185 million, meaning they've grown 32.8% annually since going public. That's a tremendous achievement. However, its international revenues as a percentage of overall sales have only grown 11.1% annually and now account for 29.3% of its business.

Not one region outside the U.S. accounts for more than 10% of revenue. The closest to double-digits is the U.K., at 8.5%, and the rest of Europe at 7.8%. Here in Canada, I've seen firsthand both working in financial services and writing about them, that Morningstar could be doing much better in my native country. Canada's population is 50% greater than in Australia and yet revenues down under are 43% higher. Given the need for higher quality investment research aimed at individual investors in Canada, whatever is working in the U.S. and U.K. isn't working north of the 49th parallel. As a glass-full type, I see this as a hidden opportunity for investors because eventually Morningstar will figure it out.




SEE: IPO Basics: Introduction

Consistent Revenue
Morningstar is a very refreshing change from the typical public company. For starters, it doesn't hold conference calls or one-on-one meetings with analysts. Instead, it allows all investors to submit questions that it answers on a regular basis. In the latest June response to questions, it provides an update revising revenues of its top five products for 2008-2011. Four out of five on the list are contract-based products that have 90-95% retention rates compared to its subscription-based products, whose retention rates average 65-70%.

What this means for investors is that you can expect future revenue from both its investment information segment (79% of revenue) and investment management segment (21% of revenue) to be relatively consistent. Operating margins may move around a bit, but revenue growth should be around 10% annually. More importantly, free cash flow will continue to grow at double digits. In 2004, it was $25 million. This past year it was $142 million: a compound annual growth rate of 28%. While its stock appears fairly valued, let me remind you that its current price-to-cash flow is 19.5 times, almost 12% lower than its five-year average. This should at least put to rest any fears of overpaying. I'd say its growth is at a reasonable price.

SEE: 5 Must-Have Metrics For Value Investors

Investment Management
One of its other growth strategies is to become a global leader in fund-of-funds investment management. In February, that goal took a body blow when its biggest client took back some fund-of-funds business that generated about $12.4 million in revenue in 2011. The loss will be felt by the investment management segment, as it represents about 9.5% of annual revenue. Even with this loss, it should be able to grow the segment by 8-9% in 2012, which is more than acceptable. The important thing to remember is that it's twice as profitable as the bigger investment information segment. In 2011, investment information generated an operating profit of $132 million on $501 million in revenue.

The investment management business can deliver the same operating profit on just $247 million in revenue. Its domestic business is growing nicely. Investment consulting, which represents about 78% of the $180.8 billion under advisement and management, generates asset-based fees. Where it's missing an opportunity once again is internationally. In 2011, the international arm of the investment consulting business had just $4.8 billion under advisement and management out of $140.4 billion or about 3.4% of the overall total. It clearly can do much better. That's why I see the two most important goals being the growth of fund-of-funds and a more significant presence outside America. If Morningstar addresses both of these issues, then its stock is a slam-dunk home run.

SEE: A Look At Corporate Profit Margins

The Bottom Line
Joe Mansueto, like Warren Buffett, gets an annual salary of $100,000 because his stock provides plenty of incentive to do well. On this reason alone, I'd buy Morningstar. For those who don't care about good corporate governance, its business is strong just the same.

At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.



Tickers in this Article: MORN, FDS, ADVS, TRI, MHP

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