Morningstar Inc (MORN) is trading at price multiple of a company that is experiencing rapid growth in earnings, but unfortunately Morningstar growth has not been rapid and the current price it is trading for is not justified.
Using the FY2011 earnings per share results of $1.97 the trailing price earnings multiply of Moningstar is equaled to roughly 32 at the moment. For a company to be justified to be trading on a price earning multiple above 30 the company must be experiencing rapid growth in earnings, such as Starbucks Corp (SBUX). Starbucks trades at the moment on a trailing price earnings multiple of roughly 34.
|Earnings Per Share||2008||2009||2010||2011|
As can be seen in the table, the earnings per share growth difference between the two companies are two very different stories. Starbucks has grown earnings from $0.43 per share in FY2008 to $1.67 per share by FY2011, this compares to Morningstar earnings per share over the same period resulting in no growth of $1.98 to $1.97. It must be considered that the future growth in earnings per share is what is most important in driving the future share price, though in my opinion its the last few years of a companies financial performance that an investor uses to best gauge the likely performance in the future. Please note I am not recommending to buy Starbucks just using their growth as a comparison.
|Total Assets (millions)||804||920||1,086||1,172|
|Total Asset Turnover (%)||62.5||52.1||51.1||53.9|
Total asset turnover ratio is calculated by dividing revenue by total assets. As total assets for Morningstar has been increasing the total asset turnover ratio has been decreasing, meaning that as Morningstar adds more assets to their balance sheet they are unable to extract the same percentage of revenue from the larger asset base. Though there was a positive sign in FY2011 that saw a small increase in the total asset turnover ratio.
There is only one analyst following Morningstar on Yahoo Finance and that analyst has estimated earnings per share of $2.24 for FY2012 and $2.56 for FY2013. At the current price and according to this analyst estimate Morningstar has a forward price earnings multiple of roughly 28 and a two year forward of roughly 24. These multiples are too high and do not justify the risk involved in owning the stock.
In summary, Morningstar has a good business and produces a steady earnings stream, but at the current price it is trading for it is overvalued. As a company that trades on the price multiples that Morningstar currently does would have to have larger expected future earnings to be justified.
Disclosure: I have no positions in any stocks mentioned, but may initiate a short position in MORN over the next 72 hours.