Morningstar, Inc. (MORN)

jsikorsk (85.07) Submitted: 2/27/08 6:18 PM : Start Price: $64.76 MORN Score: -13.93

Well, some of my small caps have dragged down my CAPs (and portfolio) performance, so lets see if I can do better with a mid cap. Let us dispense with what I do not like about the company:

To say this is not cheap by traditional standards is an understatement. P/E, PEG, P/B, EV/CF, P/S; they all seem like a tech company at the star of 2000. Also, there are some hefty expectations built into this one. The stock is up 30% over the last 52 weeks. I don't think a company like this can continue growing at the 56% clip in profitability as it has annualized over the last five years. I even wonder what went into analysts thoughts on a 26% long-term rate. I also don't like the share dilution over the last few years.

But there is much to like about Morningstar. This is a first mover in its industry that is still expanding and it is still the dominant force by far. The founder (26 when he started the company) is still in charge and relatively young. He has kept up with technology and wisely used it to advance his business. Consider that in 1983, computers, the internet, and the mutual fund business were not even close to what they are today. These are things an electronic screen cannot tell you. The CEO still owns 65% of the company, so he is invested along side me in a big way. MORN has achieved great ROE and good margins, especially considering that there is no long term debt on the books and a lot of cash. Since it is a service company, there is no inventory risk. If it wasn't for the price, I wish more companies looked like this.

So what about the price? The recent fall made me look twice at this. I already stated that the measures do not look cheap. But compare them to any year since they have been public, and note that the company has never been cheap. So I turned to my trusted friend, the DCF analysis. I used enterprise value as my share price, FCF for the trailing twelve months because I think it is not out of line with growth, and 20% growth for the next five years tapering down to 3% after ten years because it is more conservative than what the analysts predict and assumes the company has fully matured after 10 years and only matches inflation. I used a broad S&P 500 as my discount rate because, over the long term, it is my opportunity cost. I get a $75 price tag.

I think it will be volatile, but there is a lot of opportunity here.

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