Is Morningstar (MORN) Pricing Still Justified After A 50% One Year Share Price Slide
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If you are wondering whether Morningstar shares still line up with the quality of the brand you know, this article will help you connect the recent share price with what you are actually paying for the business.
The stock last closed at US$160.03, after a 3.3% decline over 7 days, a 25.2% decline over 30 days, a 23.9% decline year to date, and a 50.4% decline over 1 year. These moves may have changed how the market is thinking about its growth potential and risk.
These moves come against a backdrop of continuing interest in research, ratings and data providers, where investors are reassessing how much they are willing to pay for established franchises and recurring revenue models. For Morningstar, that conversation is now squarely focused on what constitutes a reasonable price for its core information services business.
On our checks, Morningstar scores 2 out of 6 on the valuation framework used by Simply Wall St. You can see that value score here: 2 / 6 valuation checks. This sets up a closer look at metrics like P/E, cash flows and assets, before finishing with a way of thinking about valuation that goes beyond any single model.
Morningstar scores just 2/6 on our valuation checks. See what other red flags we found in the full valuation breakdown.
The Excess Returns model looks at how much profit a company generates above the return that equity investors require, then capitalizes those “excess” profits to estimate what the business might be worth today.
For Morningstar, the model starts with a Book Value of $30.17 per share and a Stable EPS estimate of $6.83 per share, based on the median return on equity from the past 5 years. The Average Return on Equity is 17.78%, compared with a Cost of Equity of $3.18 per share. This leads to an Excess Return of $3.65 per share. The Stable Book Value is $38.44 per share, based on weighted future book value estimates from 2 analysts.
Using these inputs, the Excess Returns model produces an intrinsic value of $113.57 per share. Compared with the recent share price of $160.03, this implies Morningstar trades at a 40.9% premium to this estimate, which points to a stock that looks expensive on this framework.
For a profitable business like Morningstar, the P/E ratio is a straightforward way to link what you are paying for each share to the earnings that the company is currently generating. It helps you see how many dollars the market is willing to pay today for one dollar of earnings.
What counts as a “normal” P/E really depends on how the market views a company’s growth prospects and risk profile. Higher expected earnings growth and lower perceived risk can justify a higher multiple, while slower growth or higher uncertainty usually points to a lower P/E being more reasonable.
Morningstar’s current P/E is 17.6x, which sits below the Capital Markets industry average of 23.1x and below the peer group average of 23.9x. Simply Wall St’s Fair Ratio for Morningstar is 15.2x. This is its proprietary estimate of what a balanced P/E should be after considering factors like earnings growth, profit margins, industry, company size and risk. This tailored Fair Ratio can be more informative than a simple comparison with peers or the industry, because it adjusts for the company’s own characteristics rather than assuming all firms deserve the same multiple. With the actual P/E of 17.6x sitting above the Fair Ratio of 15.2x, the shares screen as trading richer than this framework would suggest.
Earlier we mentioned that there is an even better way to understand valuation, so let us introduce you to Narratives, which let you attach a clear story to your assumptions about fair value, future revenue, earnings and margins instead of looking at ratios in isolation.
A Narrative on Simply Wall St links three pieces together in a simple way: the story you believe about a company, the financial forecast that flows from that story, and the fair value that drops out of those numbers, all in one place on the Community page that is already used by millions of investors.
Once you set up a Narrative, the platform can compare your Fair Value to the current share price to help you decide how Morningstar aligns with your own view, and it keeps that view current by updating inputs when new information like news or earnings is released.
For example, one Morningstar Narrative on the Community page might assume more conservative revenue trends and margins and land on a much lower fair value than another Narrative that builds in stronger revenue assumptions and higher long term profitability, giving you a clear view of how different investors can look at the same stock and reach different conclusions.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
