"The financial crisis affected nearly all companies in the third quarter, and we weren't immune."
With these words, Morningstar (Nasdaq: MORN ) CEO Joe Mansueto summed up a fiscal third quarter that -- judging from the stock price -- disappointed investors mightily. Sure, objectively speaking, the firm's 12% revenue growth seems respectable, and seeing earnings per share grow 10% is better than the alternative. And yet, both numbers fell well short of analyst estimates, and marked an abrupt slowdown from the pace Morningstar had set earlier this year.
Now, I mentioned in the pre-earnings Foolish Forecast that we'd take a closer look at how the financial crisis is affecting Morningstar's business. The big worry up until now has been the risk that after JPMorgan (NYSE: JPM ) , Goldman Sachs (NYSE: GS ) , and other big brokers are no longer required to purchase independent investment advice from Morningstar, the company could lose as much as 4% of its annual revenue. That risk remains, and indeed grows closer with every passing month. But the more immediate danger to Morningstar's business, as it turns out, came from a different direction: investment management.
Morningstar reports that its "assets under advisement" declined "about 7%" year over year in Q3. Relative to Legg Mason's (NYSE: LM ) 17% assets under management tumble, that may not sound like much. But it's a whole lot worse than what we saw last month at BlackRock (NYSE: BLK ) and T. Rowe Price (Nasdaq: TROW ) , where assets under management declined only 3% and 2%, respectively.
Back to the future
But as Morningstar's former growth drivers began running on empty last quarter, its legacy business of providing independent financial data to individual investors kicked in. Revenues in the Individual segment, headlined by Morningstar.com and Morningstar Equity Research, grew 12% year over year -- a striking contrast with rival TheStreet.com's (Nasdaq: TSCM ) 8% decline in subscription-based revenue.
Margins declined even here, of course. Indeed, margins fell across the board at Morningstar, as the firmwide operating margin slipped to 27.2% for the quarter.
Valuation
And yet, when you get right down to it, I cannot see Morningstar as anything other than a "buy" at this price. Sure, it's not immune to the business cycle. Who is? Yet for all the turmoil in the financial world today, Morningstar remains on track to generate perhaps $92 million in free cash flow this year.
The resulting 18 times price-to-free cash flow ratio compares favorably to Morningstar's projected 19% long-term growth rate. And when you consider that free cash flow has been depressed this year "mainly because of spending for its new corporate headquarters," I suspect we'll see Morningstar produce significantly healthier cash profits going forward. To me, this stock's got: "Great company, good price" written all over it.
Put on your shades and gaze on Morningstar's recent performance in:
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