Morningstar Stumbles

Douglas A. McIntyre

Morningstar (NASDAQ: MORN) founder and CEO Joe Mansueto did more than any other person to change the equity and mutual fund research business when he founded the company in 1984 and shepherded it through a rapid period of growth. That growth period has stopped, at least for the time being. Investors are left to wonder whether Mansueto can write Morningstar a second act.

Morningstar’s latest earnings were barely lackluster. Revenue, at $166 million, was up only 3% in the June quarter. Net income rose 5% to $28 million. The results continue a trend that has pushed the firm’s share price down 5% over the past year, while the S&P 500 has been flat.

There were no encouraging trends in the Morningstar numbers. Revenue at its large Investment Information division rose 5%, but its smaller Investment Management division posted a 5% drop. U.S. revenue was up slightly. International was flat.

Morningstar has had trouble with its net margins for some time. Its revenue in 2008 was $502 million, and its net was $93 million for the year. In 2011, revenue moved up to $631 million, but the firm’s net was only $98 million. Recent earnings show that even the top line is frozen at recent levels, while the company has failed to control costs well.

Mansueto, it could be argued, has been a reasonable steward for shareholders. His base salary is only $100,000 a year. But he owns 49.53% of the Morningstar shares, so even if investors believe the corporation could use fresh blood, Mansueto can make certain that does not happen. This is the sort of arrangement his own army of analysts criticize in their “Management & Stewardship” evaluations when they examine other public companies.

Mansueto has been unable to articulate how Morningstar can become a growth company again. That is too bad for a number of reasons. First among them is that Morningstar forever changed the industry in which it operates, much to the benefit of investors everywhere.

Douglas A. McIntyre