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.
Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

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.

Related Articles
  1. Stock Analysis

    Fortinet: A Great Play on Cybersecurity

    Discover how a healthy product mix, large-business deal growth and the boom of the cybersecurity industry are all driving Fortinet profits.
  2. Stock Analysis

    2 Catalysts Driving Intrexon to All-Time Highs

    Examine some of the main reasons for Intrexon stock tripling in price between 2014 and 2015, and consider the company's future prospects.
  3. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  4. Charts & Patterns

    Understand How Square Works before the IPO

    Square is reported to have filed for an IPO. For interested investors wondering how the company makes money, Investopedia takes a look at its business.
  5. Technical Indicators

    4 Ways to Find a Penny Stock Worth Millions

    Thinking of trading in risky penny stocks? Use this checklist to find bargains, not scams.
  6. Professionals

    Chinese Slowdown Affects Iron Ore Market

    The Chinese economy's ongoing slowdown is having a major impact on iron ore demand.
  7. Investing Basics

    Why do Debt to Equity Ratios Vary From Industry to Industry?

    Obtain a better understanding of the debt/equity ratio, and learn why this fundamental financial metric varies significantly between industries.
  8. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  9. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares Morningstar Small-Cap Value

    Find out about the Shares Morningstar Small-Cap Value ETF, and learn detailed information about this exchange-traded fund that focuses on small-cap equities.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...
  4. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
  5. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
  6. Net Present Value - NPV

    The difference between the present values of cash inflows and ...
RELATED FAQS
  1. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!