Morningstar Does Not Deserve A ~60x P/E Ratio Growing Revenue At ~10%

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Even backmost erstwhile it was increasing integrated gross astatine ~20% we thought Morningstar (NASDAQ:MORN) was overvalued. Now that maturation has decelerated to nan azygous digits we really cannot understand why investors proceed to salary ~60 times adjusted net for nan shares. If we usage GAAP earnings, nan p/e ratio goes to triple digits. We understand that Morningstar is an charismatic business pinch bully margins and immoderate recurring earnings, but that is not capable to warrant this valuation.

The only plausible mentation that we find is that investors are hopeful that someway maturation will beryllium reignited to 20%+ successful nan future. Organic gross accrued 10.8% successful 2022, and 2.2% successful Q4. Looking astatine nan integrated gross maturation trajectory below, we would opportunity that seems to beryllium highly improbable immoderate clip soon.

Morningstar Investor Presentation

The problem for Morningstar is that moreover its crown-jewel Pitchbook business, which was increasing astatine 1 constituent supra 50%, has decelerated to ~30% successful Q4 of 2022. We judge this is nan astir charismatic business that Morningstar owns, and 1 of nan main maturation drivers. The startup financing manufacture has cooled off, truthful we don't discard nan anticipation of maturation re-accelerating successful nan early if nan existent headwinds successful nan VC manufacture dissipate.

Morningstar Investor Presentation

Morningstar Sustainalytics has besides seen its maturation complaint plummet, from adjacent to 50% previously, to now only ~26%. This is simply a business that has tremendous tailwinds resulting from maturation successful ESG investing. The truth that it is already seeing monolithic deceleration is highly disappointing.

Morningstar Investor Presentation

There are different businesses wherever nan maturation deceleration, aliases moreover antagonistic growth, is easier to justify. The champion illustration is DBRS Morningstar, nan company's standing agency, which is nan 4th largest. It knowledgeable an integrated gross diminution of 35.3% arsenic a consequence of depressed levels of world in installments issuance activity. This is explained by nan liking complaint and economical environment, which has affected bond/credit issuance. This is truthful a cyclical business which we would expect to spot travel backmost soon erstwhile conditions improve.

Morningstar Investor Presentation

Financials

The maturation deceleration has been accompanied by weakening profit margins. Both nan operating separator and nan adjusted operating separator person been trending down for galore quarters now.

We find this peculiarly concerning, arsenic it apt intends that nan institution is sacrificing profitability to support gross growth, which makes nan maturation deceleration moreover much concerning. The declining margins are besides a motion that nan company's competitory moat is weakening.

Morningstar Investor Presentation

Balance Sheet

At nan extremity of 2022 Morningstar had cash, rate equivalents, and investments totaling $414 cardinal and $1.1 cardinal of debt. In 2022 nan institution accrued its indebtedness by $750 cardinal to thief salary for $676 cardinal successful acquisitions.

In 2022 free rate travel besides decreased by ~51% to $168 million. Based connected its ~$10 cardinal marketplace cap, nan free rate travel output is truthful ~1.7%. During nan twelvemonth 2022 Morningstar besides spent $226 cardinal successful stock repurchases, which we judge could person been put to amended usage fixed nan overvaluation of its shares.

Valuation

In 2022 Morningstar's full-year nett income was $70.5 million, aliases $1.64 per diluted share. At existent prices astir $232 per share, that results successful a price/earnings ratio of ~141x. The adjusted diluted nett income per stock was $3.87, resulting successful a non-GAAP p/e ratio of ~60x. For a institution that delivered ~10% y/y integrated maturation successful 2022, and ~2.2% successful Q4, we judge those are very stretched multiples.

If we look astatine nan EV/Revenues multiple, shares are trading astatine much than 5x, which is highly high. This is not a hyper-growth package arsenic a work startup.

Data by YCharts

Despite nan deteriorating fundamentals, nan EV/EBITDA ratio is now much than 50% supra nan 10 twelvemonth average. This is nan consequence of nan stock value remaining much aliases little astatine nan aforesaid levels, while profitability decreased.

Data by YCharts

Seeking Alpha's Quant standing gives Morningstar an 'F' grade. The institution is simply not delivering nan basal gross aliases net maturation to warrant its valuation multiples successful our view. This is contempt nan truth that we do judge Morningstar to beryllium an supra mean value business, pinch immoderate charismatic characteristics.

Seeking Alpha

Risks

By acold nan biggest consequence we spot for Morningstar investors is nan highly stretched valuation, which intends shares could person important room to autumn earlier they tin beryllium supported by fundamentals. We would besides constituent retired nan declining margins arsenic a informing that nan company's moat is perchance weakening, which could consequence successful little net successful nan future.

Conclusion

Morningstar has nan very bad operation of deteriorating fundamentals and an highly stretched valuation. The maturation deceleration successful immoderate of its businesses is justified, specified arsenic for DBRS Morningstar, but for nan full of nan institution it is very concerning. The institution is besides seeing its profit margins inclination down, perchance reflecting a weakening competitory moat. Given nan ~10% integrated gross maturation complaint delivered successful 2022, and ~2.2% successful Q4, we do not judge its ~60x p/e valuation aggregate is justified. We are truthful maintaining our 'Sell' standing aft reviewing nan astir caller results.

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