Morningstar

In this article, Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024) presents Morningstar, which provides financial data, news and analytics for the financial community.

Introduction

Morningstar is a leading provider of independent investment research, data, and analysis, dedicated to helping investors make informed decisions and achieve financial success. Their mission is to provide investors with unbiased insights, trusted research, and actionable data to navigate the complexities of the financial markets. Whether it is for a novice investor seeking guidance or a seasoned professional managing portfolios, Morningstar’s platform offers valuable resources to support their investment journey.

Logo of Morningstar

Source: Morningstar

History

Morningstar, Inc. is an American financial services firm headquartered in Chicago, Illinois, and was founded by Joe Mansueto in 1984. Its initial investment was of US$80,000. In July 1999, Morningstar accepted an investment of US$91 million from SoftBank in return for a 20 percent stake in the company. The two companies had formed a joint venture in Japan the previous year.

Morningstar’s initial public offering occurred on May 3, 2005, with 7,612,500 shares at $18.50 each. The manner in which Morningstar went public is notable. They elected to follow Google’s footsteps and use the OpenIPO method rather than the traditional method. This allowed individual investors to bid on the price of the stock, and allowed all investors equal access.

In 2006, Morningstar acquired Ibbotson Associates, Inc., an investment research firm. In 2007, Morningstar acquired the mutual fund data business of S&P Global. In 2010, Morningstar acquired credit rating agency Realpoint for $52 million and begins offering structured credit ratings and research to institutional investors.

In the same year, Morningstar acquired Old Broad Street Research Ltd. (OBSR), a UK-based provider of fund research, ratings and investment advisory services, for $18.3 million. After the acquisition, renamed as Morningstar OBSR. In 2014, Morningstar acquired ByAllAccounts, Inc., a provider of innovative data aggregation technology for financial applications. In 2016, Morningstar acquires remaining ownership of PitchBook Data for approximately $225 million.

In 2019, Morningstar acquired the world’s fourth largest credit rating agency DBRS for $669 million. After the acquisition, DBRS merged with Morningstar’s credit rating business. In 2020, Morningstar entered into an agreement to acquire Sustainalytics, a research and ratings firm specializing in environmental, social and governance (ESG) insights. In 2021, Morningstar announced it would acquire the UK and international operations of the Australian wealth management platform Praemium.

In 2022, Morningstar announced that it will acquire the S&P Global-owned Leveraged Commentary & Data (LCD), a company specializing in leveraged loan market data, for $600 million up to $650 million. Today, from retirement planning to ESG (Environmental, Social, Governance) investing, Morningstar remains committed to helping individuals and institutions navigate the complexities of the financial markets and achieve their financial goals with confidence.

Key Components of Morningstar

Earnings Estimates

Price/projected earnings for a stock is the ratio of the company’s most recent month-end share price to the company’s estimated earnings per share (EPS) for the current fiscal year. According to Morningstar’s website, if a third-party estimate for the current year EPS is not available, the company will calculate an internal estimate based on the most recently reported EPS and average historical earnings growth rates.

Morningstar generates this figure in-house based on stock statistics from our internal equities databases. For stocks, this figure is calculated monthly. For funds and portfolios, Morningstar updates this figure upon receipt of the most-recent portfolio holdings from the asset manager.

The P/E ratio relates the price of the stock to the per-share earnings of the company. A high P/E generally indicates that the market will pay more to obtain the company because it has confidence in the company’s ability to increase its earnings. Conversely, a low P/E indicates that the market has less confidence that the company’s earnings will increase, and therefore will not pay as much for its stock. In most cases high average P/E ratio indicates a manager has paid a premium for stocks that have a high potential for increased earnings. If the average P/E ratio is low, the manager may believe that the stocks have an overlooked or undervalued potential for appreciation.

Revenue Projections

Morningstar aggregates earnings estimates and consensus revenue forecasts from analysts, providing insights into market expectations for future revenue levels. This data helps investors gauge sentiment and anticipate potential revenue surprises. Morningstar presents revenue projections and growth rates based on proprietary models and industry analysis.

For example, on Feb 22, 2024, Morningstar’s chief executive officer, Kunal Kapoor said that “We finished 2023 on a strong note, crossing $2 billion in revenue for the fiscal year and delivering meaningful increases in organic revenue, margins, and cash flow for the quarter”. This not only implements that the company has been successful but also shows how reliable the company data is for the investors.

Forecasts for Key Financial Metrics

Morningstar calculates and forecasts key profitability ratios such as return on equity (ROE), return on assets (ROA), and operating margins. These metrics indicate a company’s efficiency and financial health, aiding investors in evaluating investment opportunities. It provides cash flow projections, including operating cash flow, free cash flow, and cash flow from investing and financing activities. Investors can analyze cash flow trends and liquidity positions to assess a company’s ability to generate and manage cash.

In the company website, investors can access historical data and perform comparisons of key financial metrics over time, across companies, or within industries. This helps identify trends, benchmark performance, and identify investment opportunities.

Coverage

Morningstar offers investment management services through its investment advisory subsidiaries, with approximately $286 billion in assets under advisement and management as of Dec. 31, 2023. The Company operates through wholly- or majority-owned subsidiaries in 32 countries.

According to Morningstar, the company website maintains coverage oMorningstar.com offers coverage of 950 stocks, 1,150 mutual funds, and 300 ETFs, plus market news, economic analysis, portfolio-planning insights, and investment commentary.

Period

Morningstar offers several periods of windows to access and analyse the data, such as Single Period(certain definite time), Trailing Periods(end date is fixed), Rolling Window(typically used to measure consistency of data), Forward Extending Window (fixes the start date for each time period), Regular Periods from start and Regular Periods from end. These various options give the investors detailed and customised analysis of what they are looking for.

Frequency

The period and frequency of forecasts on Morningstar vary based on user needs and market dynamics. Morningstar Quantitative Rating has the unique advantage of maintaining a monthly update cycle.

Firms and Financial analysts

Morningstar, Inc. is a leading provider of independent investment insights in North America, Europe, Australia, and Asia. The Company offers an extensive line of products and services for individual investors, financial advisors, asset managers and owners, retirement plan providers and sponsors, and institutional investors in the debt and private capital markets. Morningstar has the one of the largest independent manager research teams in the world with more than 100 analysts covering more than 4000 unique funds.

Pricing

The business model of Morningstar is a three tier based pricing namely License-based, Asset-based and Transaction-based.

License-based: The majority of the research, data, and proprietary platforms are accessed via subscriptions or contract-based licensing arrangements that grant access on either a per user or enterprise-basis for a specified period of time. Licensed-based revenue includes Morningstar Data, Morningstar Direct, Morningstar Advisor Workstation, Morningstar Office, PitchBook Data, Premium Memberships on Morningstar.com, and other similar products.

Asset-based: They charge basis points and other fees for assets under management or advisement. Morningstar Investment Management, Workplace Solutions, and Morningstar Indexes products all fall under asset-based revenue.

Transaction-based: Ad sales on Morningstar.com and their Credit Ratings products comprise the majority of the products that are transactional, or one-time, in nature, versus the recurring revenue streams represented by their licensed and asset-based products.

Use of Morningstar by the Financial Community

Benchmark for Analysis

Company is known as a benchmark for analysis in the financial market. Over the years their strategy has delivered excellent diversification and risk-adjusted returns. Since the September 2000 start of its longest-tenured manager, Rolley, the fund’s 7.7% annualized gain through the end of March 2024 beat the average global allocation Morningstar Category fund by more than 3 percentage points with better Sharpe and Sortino ratios, measures of risk-adjusted results.

Market Expectations

Morningstar provides access to economic data and forecasts that shape market expectations. Users can track indicators such as GDP growth, inflation rates, unemployment figures, and interest rate projections to anticipate broader economic trends.

Earnings Season Preparation

During earnings season, Morningstar offers detailed analysis of company earnings reports relative to consensus estimates. Investors can assess whether companies meet, exceed, or fall short of market expectations, influencing stock prices and investor sentiment.

For a deeper understanding, this is an example of how they would state seasons preparation – “I think third-quarter earnings in and of themselves will generally be very strong. Management guidance last quarter probably shouldn’t be all that difficult to beat. And also the U.S. has just remained defiant in the face of tight monetary policy. So, economic growth has been much stronger than we had originally expected. In fact, if you look at our numbers here, we just recently updated our GDP forecast for the third quarter to 3.9%.”

Morningstar and Tests of Market Efficiency

Academic works

Morningstar conducts and publishes academic research on market efficiency, analyzing factors that contribute to market anomalies and deviations from efficient market hypotheses. This research informs investment strategies and challenges conventional market theories. The efficient-market hypothesis, or EMH, implies that the market quickly and accurately incorporates all information regarding a stock’s actual value into its price. They believe that Investors can’t gain an informational advantage and shouldn’t try to beat the market. Instead, they should simply track the market through a broad market index fund.

Information Dissemination

Morningstar facilitates information dissemination and transparency, providing investors with access to comprehensive data and research reports. By empowering investors with timely and accurate information, Morningstar contributes to market efficiency by reducing information asymmetry.

Pros and Cons

Morningstar compares fund performance against relevant benchmarks and market indices, offering insights into fund managers’ ability to generate alpha (excess returns). By evaluating relative performance, Morningstar assesses market efficiency and the value of active management.

Morningstar’s performance attribution analysis helps investors evaluate the effectiveness of investment strategies and identify sources of outperformance or underperformance.

On the other side, Morningstar is primarily a research and analysis platform, and it may not offer direct trading capabilities or execution of investment transactions. Like any investment service, Morningstar’s ratings and recommendations are based on historical data and assumptions, and they may not fully anticipate future market fluctuations or uncertainties.

Conclusion

Morningstar offers valuable resources for investors seeking to research, analyze, and manage their investments effectively. Understanding the pros and cons can help investors leverage Morningstar’s strengths while being mindful of potential limitations or considerations.

Why should I be interested in this post?

Understanding how financial professionals use platforms like Morningstar can contribute to your professional development, especially if you’re pursuing a career in finance, investment management, or financial advising. It demonstrates your interest in industry trends and best practices.

Useful resources

Morningstar Morningstar, Inc. Reports Fourth-Quarter, Full-Year 2023 Financial Results

Wikipedia Morningstar

Morningstar Articles, products and services for professional investors

Morningstar Performance Reporting – Time Periods

Morningstar Earnings Season: What to Expect

About the author

The article was written in May 2024 by Nithisha CHALLA (ESSEC Business School, Grande Ecole Program – Master in Management (MiM), 2021-2024).