Morningstar Inc. (MORN)

While the company is known for its expertise in domestic mutual funds, international expansion has grown to the point it is now more than 20% of revenue. The potential to serve emerging markets is incredible as investors are craving strong quality research products in this under-served area. Currently the company has a presence in 21 different international markets spanning North America, Europe and Asia. The diversification away from dollar denominated revenue also helps to stabilize earnings and has most recently led to additional gains on currency translation.

Morningstar also has excellent visibility, with a high base of recurring revenue. Recurring revenue type companies are best able to cope with the enormous strains of high growth because they can anticipate future problems well in advance and plan ahead. Because they are the easiest to keep under control and the least demanding to run, they are also the least likely to stumble and produce disappointing earnings. 89% of Morningstar’s revenue is recurring.23% of this revenue comes from Morningstar.com.The other 66% comes from other contractual renewals. Contracts for Morningstar.com and the company’s subscription based services are for the most part renewed annually. •Based on ttm revenue of $404 million, the company currently has about a $359M run rate. •Revenue is also well diversified with sales from 5 main sources: Investment Consulting, Advisor Workstation, Licensed Data, Morningstar.com, and Principia.

The company has divided its revenues into three primary categories. The Individual Segment encompasses the well known mutual fund service served to consumers through the companies website. This segment received revenues of 23.7m last quarter primarily through premium membership subscriptions and advertisements sold on the site. The second division is the Advisor Segment which provides workstation technology and managed portfolios typically to independent wealth advisers. This segment accounted for 29.3m in revenues last quarter and benefited from strong growth in the number of licenses in use. Finally, the Institutional segment covers investment consulting, retirement advice and more. This is the crown jewel of the company with revenue of $60.8m in the last quarter. With improving margins, the segment saw operating income more than double at $20.7m.

The company also has good potential to increase its profit margins.The company is able to achieve operating leverage through its proprietary databases.These databases have a high fixed cost associated with their development, but have a minimal variable cost. The company uses its databases to leverage across all of its services. Margin expansion may allow the company to beat analyst estimates, as the sell-side does not always factor margin expansion into their models.

The company has divided its revenues into three primary categories. The Individual Segment encompasses the well known mutual fund service served to consumers through the companies website. This segment received revenues of 23.7m last quarter primarily through premium membership subscriptions and advertisements sold on the site. The second division is the Advisor Segment which provides workstation technology and managed portfolios typically to independent wealth advisers. This segment accounted for 29.3m in revenues last quarter and benefited from strong growth in the number of licenses in use. Finally, the Institutional segment covers investment consulting, retirement advice and more. This is the crown jewel of the company with revenue of $60.8m in the last quarter. With improving margins, the segment saw operating income more than double at $20.7m.

The company also has good potential to increase its profit margins.The company is able to achieve operating leverage through its proprietary databases.These databases have a high fixed cost associated with their development, but have a minimal variable cost. The company uses its databases to leverage across all of its services. Margin expansion may allow the company to beat analyst estimates, as the sell-side does not always factor margin expansion into their models.

First, the company operates in an area highly conducive to growth as it is levered to an emerging middle class around the globe. Half of the world’s wealth is domiciled outside of the United States. Morningstar will also benefit from an increased need for financial advice from baby boomers who have started to reach retirement age. Moreover, the company has limited competition because it dominates the financial advisor market niche. Morningstar also keeps out competition through strong branding, proprietary tools, and deep databases. Finally, the company is profitable enough to finance most of its growth internally- with $91M in FCF (ttm), and has no debt.