Foolish Forecast: Morningstar Rises

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Tic-tac-toe, investors want to know: After "beating estimates" in each of the last two quarters, will Morningstar (Nasdaq: MORN) make it three in a row this week? The rater of mutual funds and stocks reports its fiscal fourth-quarter and full-year 2007 numbers Thursday afternoon.

What analysts say:

• Buy, sell, or waffle? Two analysts follow Morningstar, both rating it a hold.
• Revenue. On average, they're looking for 31% sales growth to $114.4 million.
• Earnings. Profits are predicted to climb 48% to $0.43 per share.

What management says:
Once again, we turn to Morningtar's monthly round-up of investor-submitted questions for some insight into its business. As you'll recall, in past reviews, we've learned that Morningstar considers McGraw-Hill (NYSE: MHP) and Thomson (NYSE: TOC) its two most significant publicly traded rivals in the equity research space. In January, we got a hint of competition yet to come.

Morningstar is considering "expanding our business to provide independent credit ratings." Not any time soon, mind you, but the recent turmoil in the credit markets, and increasing flak being taken by Fitch, Moody's (NYSE: MCO), and McGraw-Hill's Standard & Poor's, appear to be softening up the market for attack. So get ready to add Fitch and Moody's to your list of rivals to watch.

What management does:
Actually, maybe Fitch, Moody's, and McGraw need to watch their backs -- Morningstar is one strong competitor in the markets in which it operates. At each of the rolling gross, operating, and net levels, margins put together back-to-back rising quarters in June and September.

Margins	6/06	9/06	12/06	3/07	6/07	9/07
Gross	72.1%	72.4%	72.4%	72.4%	73%	73.4%
Operating	23.9%	24.7%	24.6%	24.2%	25%	26%
Net	16%	16.7%	16.4%	15.9%	16.4%	16.7%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
For all its operational strength, Morningstar's price scared me out of my own position in the stock several months back. But with shares down 17% from the company's December 2007 highs, might now be the time to get back in, before the (good?) news breaks on Thursday?

I'd love to answer "definitely," but in fact, I'm less than enthused. With a trailing P/E ratio of 47, even Morningstar's 26% rate of projected profits growth looks slow. And sure, the company generates about 35% more cash profit than it gets to report as "net income" under GAAP, but that still leaves the stock with a price-to-free cash flow ratio of 32. For comparison, that's cheaper than TheStreet.com's (Nasdaq: TSCM) 41 ratio, or INVESTools' (Nasdaq: SWIM) 39.

In this Fool's view, Morningstar is the classiest business, with the deepest moat of these three. It's the one I'd buy before either of its rivals -- but until the prices come down, or the cash flow goes up, I won't be buying any of them just yet.

Put on your shades and gaze on Morningstar's recent performance in:

• Foolish Forecast: Will Morningstar Miss?
• Morningstar Explodes
• Foolish Forecast: Morningstar in Decline?