Please ensure Javascript is enabled for purposes of website accessibility

Morningstar Earnings Signal an Improving Financial Market

By Lee Samaha – Feb 12, 2015 at 5:15PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Morningstar's results indicate that the U.S. financial markets are improving.

It's been a pretty good few years for the financial services industry, with rising equity markets and loosening credit markets creating favorable conditions for asset managers, brokerages, financial advisors, and the like. Therefore, it's no surprise to see financial information services provider Morningstar (MORN -0.55%) reporting increasing profits. When financial firms make money, they are more likely to purchase information services.

Still, Morningstar does need to execute within highly competitive markets. Here is a look at its recent fourth-quarter results, and an assessment of how it's performing.

Morningstar reports
A brief look at the headline data:

  • Fourth-quarter revenue is $196.4 million, versus analyst estimates of $196.6 million
  • Fourth-quarter adjusted EPS is $0.71, versus analyst estimates of $0.66

While revenue growth of 8.8% came in slightly lower than expected by analysts, Morningstar managed to increase costs by only 8.1% -- leading to an expansion in operating margin of 50 basis points (100 basis points equals 1%).

A look at its operating expenses in the quarter reveals how Morningstar was able to increase profitability:


Q4 2014

Change From Q4 2013




Cost of Revenue



Sales & Marketing



General & Administrative



Depreciation & Amortization



Total Operating Expense



Operating Income



Source: Morningstar, Inc presentations; all figures in thousands of US Dollars unless stated.

In the earnings release, although he did not expressly state it, CEO Joe Mansueto's commentary likely gave hope to investors looking for more margin expansion going forward: "After investing heavily in the business in late 2013 and early 2014 to support our key growth initiatives, we slowed the pace of spending to better balance expense and revenue growth."

Information management
Morningstar broke out revenue in two different product groups -- "Investment Information" and "Investment Management" -- both of which reported good growth in the quarter. Investment information revenue increased 7.5%, to $154 million, in the fourth quarter, while investment management revenue grew 14%, to $37.2 million in the same period.

The full-year revenue breakout is shown below. Incidentally, Morningstar generated 72.5% of 2014 revenue from the U.S. market, so it's very much a play on the U.S. financial services industry.

Source: Morningstar, Inc Presentations; figures in millions.

Within the core investment information product group, management cited strong growth in the quarter from Morningstar Direct and Morningstar Credit Ratings. The former is an investment analysis platform that allows investment professionals to mine information and then create customized reports for clients. For example, it could be used by a wealth management firm to present portfolio information to a client.

If financial firms are flourishing and expanding employment, it's a safe bet that they will be buying more licenses for their workers. Indeed, Morningstar Direct licenses increased by 18.1% in 2014 -- another good sign for the investment industry.

Morningstar Credit Ratings analyzes and rates commercial mortgage-backed securities, or CMBS, and residential mortgage-backed securities, or RMBS. Given that Morningstar's management stated that its Credit Ratings operations were one of the main contributors to growth in the quarter, it's a good sign that lending standards are loosening in the economy at large.

Investment management
Investment management is a somewhat mixed picture. Average assets under management, or AUM, increased 1.3%, to $169.8 billion from last year's fourth quarter. It's a key metric to follow with all investment managers because they generate management and performance fees from AUM.

However, Morningstar reported some mixed results in the quarter. Investment advisory AUM actually fell 3%, to $81 billion in the quarter, as the "business continues to feel the effects of variable annuity clients moving the management of fund-of-funds portfolios in house." However, retirement solutions AUM more than offset the decline by rising 17.1%, to $76.8 billion.

The bottom line
All told, it was a solid quarter for Morningstar, and the company is executing well on its growth plan. There were also some good indicators for the financial services sector within its results, particularly with regard to the environment for CMBS and RMBS issuance. It's very difficult to predict where interest rates and the economy will go, but provided the financial services sector remains in good shape, Morningstar looks set to do well in 2015.

Lee Samaha has no position in any stocks mentioned. The Motley Fool recommends Morningstar. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Morningstar, Inc. Stock Quote
Morningstar, Inc.
$212.32 (-0.55%) $-1.18

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/03/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.