Behind the Business: 3 Questions for Morningstar

Shareholders don't just own stocks. We invest in businesses. Every share we buy purchases a stake in a company -- a sliver of a living, breathing enterprise run by a management team that ultimately determines the fate of the money we invest.

That's why The Motley Fool regularly contacts public companies and executives on our community's behalf, asking them the questions shareholders would find relevant. Because while quantitative measures are important, it's also crucial for investors to assess the less tangible aspects of the businesses they own (or are thinking of owning).

We recently surveyed select companies to gain insights into their business. Today, we highlight Morningstar (Nasdaq: MORN  ) :





Market Cap

$2.4 billion


Information technology and publishing


Thomson Reuters (NYSE: TRI  ) , FactSet Research (NYSE: FDS  ) , and Google (Nasdaq: GOOG  ) , among others

Here are Morningstar's (unedited) answers to our email query about its business:

TMF: What steps have you taken to navigate your business through the economic turmoil of the past 12 months?

We're listening to our customers and working closely with them to help them get the most out of their Morningstar services. On the expense side, we've always been a pretty frugal company. This year, we had to implement a number of cost-savings measures with a goal of keeping our workforce intact and not making across-the-board job cuts or salary reductions, like many other companies have done. We had to make some difficult decisions, like temporarily suspending the 401(k) match for our U.S. employees, reducing our 2009 bonus expense, eliminating most planned new hires, suspending salary increases, and cutting travel and entertainment expense. We opted for a model of shared sacrifice to reduce our costs because we wanted to preserve our great workforce. We have a healthy balance sheet and no bank debt. So, although it's been a tough year, we believe we're weathering the turmoil well and we're in a strong position to take advantage of opportunities as business conditions improve.

TMF: What are the top two or three metrics to which your business pays the closest attention?

When our equity analysts evaluate a stock, they focus on assessing the company's estimated intrinsic value -- the value of the company's future cash flows, discounted to their worth in today's dollars. Our approach to evaluating our business works the same way. Our goal is to increase the intrinsic value of our business over time, which we believe is the best way to create value for shareholders.

We provide three measures that can help investors generate their own assessment of how our intrinsic value has changed over time: revenue, operating income (loss), and free cash flow, which we define as cash provided by or used for operations less capital expenditures.

We also calculate a retention rate to measure how successful we've been in maintaining existing business for products and services that have renewable revenue.

TMF: Now that the first decade of the new century is drawing to a close, we'd like to take a moment to reflect on what lies ahead. What excites you most about your business?

We're excited about our growth prospects and the investments we're making today that we believe will pay off as business conditions improve. We've made four acquisitions as of September 2009, and we continue to invest in our people, technology, databases, design, and product innovation. We've made significant investments in our international operations and expanding our brand and offerings outside the United States. We're making these investments because we believe they will widen our "economic moat," or our sustainable competitive advantages in the future.

Morningstar is rated five stars (out of a possible five) by our Motley Fool CAPS community. Do you agree with our community's bullish assessment? Click here to rate the stock and cast your opinion.

The Fool owns shares of Morningstar, which is a Motley Fool Stock Advisor recommendation. Google and FactSet Research are Rule Breakers picks. The Motley Fool has a disclosure policy.

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  • Report this Comment On December 18, 2009, at 6:21 PM, 1sweet1 wrote:

    Impressive answers to the questions. I'm surprised that that translates to only two CAPS stars.

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