In its short life as a publicly traded company, mutual fund- (and now stocks-, too!) rater Morningstar (NASDAQ:MORN) has twice missed analyst estimates, and thrice beaten them (tying once.) Technically speaking, to restore balance to the Force, it must report fiscal Q1 2007 numbers short of Wall Street's expectations on Thursday.

Hmm. Come to think of it, no one's ever really explained why this Force thing needs to be balanced. Maybe it's more of a suggestion than a rule? Investors should hope so.

What analysts say:

  • Buy, sell, or waffle? Only two analysts follow Morningstar, splitting their votes buy/hold.
  • Revenues. On average, they're looking for 29% sales growth to $90.6 million.
  • Earnings. Profits are predicted to again lag sales growth, up 24% to $0.36 per share.

What management says:
Investors in Morningstar are lucky stiffs. I must say I envy them for their company's willingness to answer questions clearly and publicly (even if sometimes a bit defensively). In recent 8-K filings with the SEC, publishing answers to investor queries, Morningstar provided several key insights into its business model. For instance: Recurring revenues from the firm's "paid Premium memberships on" are the "primary way that we monetize the value of subscribers." These revenues increased modestly year over year last quarter, and the firm typically raises Premium membership rates every year (so expect more of the same.) That said, Morningstar admitted that it has considerable "customer churn," with renewal rates for its various paid services ( Premium service, newsletters, and Principia) averaging 60% to 65%.

For comparison purposes, it looks like Morningstar is going the opposite route to rival (NASDAQ:TSCM), which has a stated goal of becoming a less subscription-driven business, and one more emphasizing advertising revenue. In contrast, Morningstar got just 12% of its revenues from advertising last year.

What management does:
Profitability-wise, this business decision currently looks rather "six in the one hand, a half dozen in the other"-ish. Just like, Morningstar's gross margins are high (higher even than's) and stable. Also like, operating and net margins are ramping nicely.





























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:
So help me, but I just can't get enough of the great writing material Morningstar gives up gratis in its 8-K filings. Let me mine this resource once more on the subject of stock splits and management level-headedness. One complaint ran:

... Most of the shares are in the hands of mutual funds and the stock only trades 66,200 [shares per] day. I'm only a small retail investor, but the small float makes this stock too risky to take on a large position. How about a split?

 Morningstar responded:

The lack of liquidity in Morningstar's stock reflects the large percentage of insider ownership. Joe Mansueto, our founder, chairman, and CEO, currently owns approximately 70% of our outstanding shares ... As a result, the percentage of shares that are freely traded in the market is low ... We don't currently have any plans for a stock split. Although a lower stock price might improve perceived trading liquidity [emphasis added] ... our focus is on maximizing Morningstar's long-term intrinsic value ... In addition, a stock split wouldn't impact the stock's float in percentage terms, so it's not clear if it would substantially improve liquidity.

Morningstar, I hope you don't mind, but I'm planning to blatantly steal that quote the very next time I hear an otherwise reasonable firm like Lifeway (NASDAQ:LWAY) split its shares and assert it's doing so not just for the PR value, but to "improve liquidity."

What did we expect to see at Morningstar last quarter, and what did we get? Find out in:

Fool contributor Rich Smith owns shares of The Fool has a disclosure policy.