Morningstar Stock Shows Every Sign Of Being Modestly Overvalued

GuruFocus.com
·4 min read

- By GF Value

The stock of Morningstar (NAS:MORN, 30-year Financials) appears to be modestly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $233.06 per share and the market cap of $10 billion, Morningstar stock shows every sign of being modestly overvalued. GF Value for Morningstar is shown in the chart below.


Morningstar Stock Shows Every Sign Of Being Modestly Overvalued
Morningstar Stock Shows Every Sign Of Being Modestly Overvalued

Because Morningstar is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 14.9% over the past five years.

Link: These companies may deliever higher future returns at reduced risk.

It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. Morningstar has a cash-to-debt ratio of 0.76, which is worse than 74% of the companies in Capital Markets industry. The overall financial strength of Morningstar is 6 out of 10, which indicates that the financial strength of Morningstar is fair. This is the debt and cash of Morningstar over the past years:

Morningstar Stock Shows Every Sign Of Being Modestly Overvalued
Morningstar Stock Shows Every Sign Of Being Modestly Overvalued

Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Morningstar has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $1.5 billion and earnings of $5.89 a share. Its operating margin is 16.31%, which ranks in the middle range of the companies in Capital Markets industry. Overall, the profitability of Morningstar is ranked 9 out of 10, which indicates strong profitability. This is the revenue and net income of Morningstar over the past years:

Morningstar Stock Shows Every Sign Of Being Modestly Overvalued
Morningstar Stock Shows Every Sign Of Being Modestly Overvalued

One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Morningstar is 14.9%, which ranks better than 74% of the companies in Capital Markets industry. The 3-year average EBITDA growth is 18.3%, which ranks in the middle range of the companies in Capital Markets industry.

Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Morningstar's ROIC was 8.04, while its WACC came in at 7.82. The historical ROIC vs WACC comparison of Morningstar is shown below:

Morningstar Stock Shows Every Sign Of Being Modestly Overvalued
Morningstar Stock Shows Every Sign Of Being Modestly Overvalued

To conclude, the stock of Morningstar (NAS:MORN, 30-year Financials) is estimated to be modestly overvalued. The company's financial condition is fair and its profitability is strong. Its growth ranks in the middle range of the companies in Capital Markets industry. To learn more about Morningstar stock, you can check out its 30-year Financials here.

To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.

This article first appeared on GuruFocus.

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