Is Morningstar (MORN) Pricing Reflects Recent Share Slide And Earnings Multiple Check

• If you are wondering whether Morningstar is attractively priced right now, it helps to step back and look at what the recent share price and valuation checks are actually telling you.
• The stock last closed at US$183.21, with returns of 17.9% over the past 30 days, a 3.6% decline over 7 days, and year to date and 1 year returns of 12.9% decline and 35.7% decline respectively, while the 3 year and 5 year returns are 1.7% and 20.4% decline.
• Recent coverage has focused on Morningstar’s role as a data and research provider and how investors may be reassessing its long term position in the investment services space. This context helps frame the recent share price volatility and sets up a closer look at what investors might be paying for that business model today.
• On our valuation checklist, Morningstar scores 2 out of 6, which means it appears undervalued on some measures but not on others, and next we will walk through those methods before finishing with a smarter way to pull them all together.

Morningstar scores just 2/6 on our valuation checks. See what other red flags we found in the full valuation breakdown.

Approach 1: Morningstar Excess Returns Analysis

The Excess Returns model looks at how much profit a company is expected to earn above the return required by shareholders, then converts that stream of excess earnings into an intrinsic value per share.

For Morningstar, the model starts with a Book Value of $30.75 per share and a Stable EPS 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%, while the Cost of Equity is $3.12 per share. The difference between what shareholders require and what the business is expected to earn is captured in an Excess Return of $3.71 per share.

The model also uses a Stable Book Value of $38.44 per share, sourced from weighted future Book Value estimates from 2 analysts, to extend these excess returns into the future. Putting this together, the Excess Returns valuation points to an intrinsic value of about $117.13 per share.

Compared with the recent share price of US$183.21, this implies Morningstar is about 56.4% overvalued on this measure.

Result: OVERVALUED

Our Excess Returns analysis suggests Morningstar may be overvalued by 56.4%. Discover 48 high quality undervalued stocks or create your own screener to find better value opportunities.

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Morningstar.

Approach 2: Morningstar Price vs Earnings

For profitable companies like Morningstar, the P/E ratio is a useful shorthand for what the market is paying for each dollar of earnings. This makes it a natural next check alongside the intrinsic value work you saw earlier.

A higher or lower P/E usually reflects what investors expect for future earnings growth and how much risk they see in those earnings. Higher expected growth or lower perceived risk can justify a higher “normal” P/E, while lower growth or higher risk tends to justify a lower one.

Morningstar currently trades on a P/E of 19.38x. That sits below the Capital Markets industry average of 22.52x and below the peer group average of 24.74x, which indicates the market is attaching a lower multiple than some comparables.

Simply Wall St’s Fair Ratio for Morningstar is 14.75x. This is a proprietary view of what P/E might make sense after factoring in the company’s earnings profile, industry, profit margins, size and risk, rather than only lining it up against simple peer or industry averages.

Because the Fair Ratio of 14.75x is below the current P/E of 19.38x, this multiple-based check points to the shares looking overvalued on this measure.

Result: OVERVALUED

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Upgrade Your Decision Making: Choose your Morningstar Narrative

Earlier we mentioned that there is an even better way to understand valuation, so let us introduce you to Narratives. Narratives let you attach a clear story to the numbers you are already looking at, such as your view of fair value and your expectations for Morningstar’s future revenue, earnings and margins.

A Narrative is simply your own take on what a company is doing, how that might show up in its financials over time, and what that combination suggests a share could reasonably be worth.

On Simply Wall St, within the Community page used by millions of investors, Narratives guide you from story to forecast to fair value. They then make it easy to compare that fair value to the live share price so you can decide whether the gap looks attractive enough to consider buying or selling.

Because Narratives update automatically when new information such as earnings or major news is added, your view of Morningstar does not stay frozen. You can see, for example, one investor who thinks the company is worth far more than the current US$183.21 price while another assigns a fair value that sits well below that level.

Do you think there’s more to the story for Morningstar? Head over to our Community to see what others are saying!

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.

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