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This Morningstar, Inc. (MORN) stock analysis is the 6th in my series of analyses of Financial Data & Stock Exchanges industry participants. Please access the archives to read previous posts.
I view the Financial Data & Stock Exchanges industry as an attractive industry in which to invest for the long term. I currently have exposure to the following in retirement accounts, for which I do not disclose details, and/or in the FFJ Portfolio:
- S&P Global (SPGI) - guest post at Dividend Power
- Moody's (MCO)
- CME Group (CME) - guest post at Dividend Power
- Intercontinental Exchange (ICE)
These industry participants will release earnings on the following dates and I intend to review each company shortly following their respective earnings release.
- FactSet Research Systems Inc. (FDS) - released September 28
- Nasdaq, Inc. (NDAQ) - released October 20
- S&P Global Inc. (SPGI) - released October 26
- MSCI Inc. (MSCI) - released October 26
- CME Group Inc. (CME) - released October 27
- Morningstar, Inc. (MORN) - released October 27
- Intercontinental Exchange, Inc. (ICE) - released October 28
- Moody's Corporation (MCO) - released October 28
- CBOE Global Markets, Inc. (CBOE) - released October 29
- TMX Group Limited (X.to) - November 8
I intend to review each company shortly following their respective earnings release.
Value Line, Inc. (VALU) released its Q1 2022 results for the quarter ending July 31 on September 13, 2021. This is a small-cap company ($0.31B market cap). I do not invest in small-cap companies, and therefore, do not intend to review it.
Morningstar - Stock Analysis - Industry Overview
Further commentary about the industry and how industry participants are expanding into adjacent lines of business is found in my recent FactSet Research post.
Morningstar - Stock Analysis - Business Overview
MORN sells products and services that generate revenue in 3 major categories:
- Licensed-based: the majority of MORN's research, data, and proprietary platforms are accessed via subscription services that grant access on either a per-user or enterprise basis for a specified period. Licensed-based revenue includes Morningstar Data, Morningstar Direct, Morningstar Advisor Workstation, PitchBook, Sustainalytics, and other similar products. Licensed-based revenue represented 67.3% of FY2020 consolidated revenue compared to 68.9% in FY2019 and 73.7% in FY2018.
- Asset-based: MORN charges basis points and other fees for assets under management or advisement. Its Morningstar Investment Management, Workplace Solutions, and Morningstar Indexes products all fall under asset-based revenue. Asset-based revenue represented 16.1% of FY2020 consolidated revenue compared to 17.9% in FY2019 and 19.6% in FY2018.
- Transaction-based: credit ratings and ad sales on Morningstar.com comprise the majority of the transactional products, or one-time, in nature, versus the recurring revenue streams represented by our licensed and asset-based products. Transaction-based revenue represented 16.6% of FY2020 consolidated revenue compared to 13.1% in FY2019 and 6.7% in FY2018.
Revenue by major category and key product area for the first 3 quarters of FY2021 and FY2020 is accessible on page 10 of 12 in the October 27, 2021 earnings release. YTD2021 licensed-based, asset-based, and transaction-based revenue is ~67%, ~16%, and ~17% of total revenue.
The following image reflects the quarterly revenue growth trend for MORN's 3 major categories. Further details are provided in the Q3 earnings presentation.
Part 1 of MORN's FY2020 10-K has a comprehensive overview of the company's history, business strategy, the competitive landscape, risk factors, and more.
Morningstar - Stock Analysis - Financials
Q3 and YTD2021 Results
MORN's Q3 and YTD2021 results are accessible in its earnings release and accompanying earnings presentation.
While MORN made a $10 million repayment on its long-term debt in Q3, it received a comparable $10 million in Q3. The long-term debt as of the end of Q3 2021 still consists of a $26 million Term Facility and $348.3 million of 2.32% Senior Notes due October 26, 2030. The amount owing under the Senior Notes represents the net proceeds of a $350 million Private Placement Debt Offering that was completed October 26, 2020. Interest on the 2030 Notes is paid semiannually on each October 30 and April 30 during the term and at maturity.
YTD diluted EPS decreased 7.9% to $3.16 versus $3.43 in the prior-year period. Adjusted diluted EPS increased by 27.2%. The reason for the decline in diluted EPS is attributed to higher operating expenses as explained in the earnings release. Furthermore, MORN's earnings in FY2020 are distorted by the reported $50.9 million 'Holding gain on previously held equity interest'; this relates to MORN's purchase of the remaining interest in Sustainalytics in July 2020.
When various adjustments are made (see page 12 of 12 in the earnings release), MORN has generated YTD adjusted EPS of $4.86 versus $3.82 for the same timeframe in FY2020.
Free Cash Flow (FCF)
Full year FCF in FY2016 - FY2020 is $150.9, $183.5, $238.7, $254.4, and $307.6
YTD cash provided by operating activities increased 16.4% to $314.0 million from $269.7 million in FY2020.
YTD free cash flow increased 12.7% to $242.4 million from $215 million in FY2020.
Excluding $16.6 million of M&A-related earn-out payments, operating cash and free cash flow would have grown by 22.6% and 20.5%, respectively.
This image shows how MORN allocated capital in Q3 2021.
Source: MORN - Q3 2021 Earnings Presentation - October 27, 2021
FY2022 Guidance
Management does not provide guidance.
Morningstar - Stock Analysis - Credit Ratings
No major rating agency rates MORN.
In connection with the acquisition of Ratings Acquisition Corp (DBRS) on July 2, 2019, MORN entered into a senior credit agreement that will expire on July 2, 2024. This 5-year multi-currency credit facility has an initial borrowing capacity of up to $0.75B including a $0.3B revolving credit facility and a term loan facility of $0.45B. The proceeds of the Term Facility and initial borrowings under the Revolving Credit Facility were used to finance the acquisition of DBRS. The proceeds of future borrowings under the Revolving Credit Facility may be used for working capital, capital expenditures or any other lawful corporate purpose.
Management believes available cash balances and investments, along with cash generated from operations and the credit facility, will be sufficient to meet operating and cash needs for at least the next 12 months. The company focuses on maintaining a strong balance sheet and liquidity position.
Cash reserves are held in cash equivalents and investments and the company maintains a conservative investment policy. Most of its investment balance is in stocks, bonds, options, mutual funds, money market funds, or exchange-traded products that replicate the model portfolios and strategies created by MORN. These investment accounts may also include exchange-traded products where Morningstar is an index provider.
~64% of MORN's cash, cash equivalents, and investments balance as of June 30, 2021 was held by operations outside the United States, up from 60% as of December 31, 2020. The U.S. directly-owned foreign subsidiary earnings are generally considered to be permanently reinvested.
Dividend and Dividend Yield
MORN does not maintain its dividend history on its website. This information, however, is accessible on NDAQ's website.
The 4th consecutive $0.315 quarterly dividend was distributed on October 29, 2021. I anticipate a ~$0.02/quarter dividend increase will be announced in early January 2022.
With shares trading at ~$321, the current dividend yield is ~0.4%.
In Q3, MORN distributed $13.6 million in dividends versus $12.9 million in Q3 2020. Furthermore, it has distributed $40.6 million versus $38.6 million in the first 3 quarters of FY2020.
MORN has historically maintained a low dividend payout ratio as funds are retained to grow the business.
Most of the total return from an investment in MORN is likely to continue to come by way of capital appreciation. This makes it extremely important that shares be acquired when reasonably valued. If we get a resurgence in interest rates, the valuation of many richly valued companies may likely experience a sharp pullback.
In December 2020, MORN's Board of Directors approved a new share repurchase program that authorizes the repurchase of up to $0.4B in shares of the outstanding common stock; this new authorization expires on December 31, 2023. In the first six months of 2021, MORN did not repurchase any shares and had approximately $400.0 million available for future repurchases as of June 30, 2021
The average shares outstanding (in millions) in FY2012 - FY2020 is 49.2, 46.5, 45, 44.3, 43.3, 43, 43, 43.2, 43.2. The weighted average diluted shares outstanding in the first 3 quarters of FY2021 is 43.3.
In my opinion, repurchasing no shares when MORN's valuation is at the current level is a wise decision on the part of MORN's Board.
Morningstar - Stock Analysis - Valuation
Looking at YTD adjusted EPS of $4.86 and $1.38 in Q3 2021 I estimate FY2021 adjusted EPS will be ~$6.20 - $6.28. Using the current ~$321 share price, the forward adjusted diluted PE is ~51.4.
MORN has generated YTD diluted EPS of $3.16 and I anticipate FY2021 diluted EPS of ~$4.25 - ~$4.33 thus giving us a forward diluted PE of ~75.
By way of comparison, MORN generated $3.72, $3.18, $4.25, $3.52, and $5.18 of diluted EPS in FY2016 - FY2020.
MORN must be the data provider for the 2 trading platforms I use and also for NDAQ's site from which I access MORN's dividend history because NO broker estimates for FY2021 - FY2024 and NO historical PE ratios are available. I can only approximate MORN's historical adjusted diluted PE levels by looking at the historical stock price graph on a year-by-year basis and comparing stock price levels to historical adjusted diluted EPS ($4.61 in FY2018, $3.94 in FY2019, and $5.40 in FY2020). This rudimentary method of determining MORN's historical valuation leads me to conclude that MORN's current valuation is currently above the historical norm.
Morningstar - Stock Analysis - Final Thoughts
My reluctance to invest in MORN has nothing to do with its credit risk or the quality of the business. My concern is the current valuation. I think shares are priced to perfection, and therefore, I prefer to wait for a better entry point.
Stay safe. Stay focused.
I wish you much success on your journey to financial freedom!
Note: Please send any feedback, corrections, or questions to [email protected].
Disclosure: I am long SPGI, MCO, CME, and ICE. I do not currently hold a position in MORN and do not intend to initiate a position within the next 72 hours.
Disclaimer: I do not know your circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your research and due diligence. Consult your financial advisor about your specific situation.
I wrote this article myself and it expresses my own opinions. I do not receive compensation for it and have no business relationship with any company mentioned in this article.
