Morningstar profit jumps 80 percent

Date: Thursday, November 2, 2006
Author: Matthew Keenan, Bloomberg News

Morningstar Inc., the U.S. company best known for its mutual-fund ratings, said third-quarter earnings jumped 80 percent on acquisitions and revenue from international units.

Net income increased to $13.5 million, or 29 cents a share, from $7.5 million, or 17 cents, a year earlier, the Chicago-based company said in a statement today. The results sent the shares 7.1 percent higher, their biggest one-day gain since July 19. Revenue rose 44 percent to $81.8 million.

Chief Executive Officer Joe Mansueto has used acquisitions this year to expand the information Morningstar sells to individuals, institutions and financial advisers. The addition of asset-allocation firm Ibbotson Associates of Chicago in March and Sydney-based Aspect Huntley Pty Ltd. in July accounted for more than half of its revenue increase in the quarter.

``It's a growth story,'' said Marvin Loh, a research analyst at Oppenheimer & Co. in Boston. ``It seems to be on track.'' Loh rates Morningstar a ``buy'' and doesn't own any of its shares.

Morningstar shares have more than doubled since the company went public in May 2005. They rose $2.84 to $42.71 in Nasdaq Stock Market trading.

Institutional sales, including investment consulting and retirement advice, increased 60 percent to $38.6 million. Ibbotson, founded by Yale University professor Roger Ibbotson, contributed $8.2 million of revenue.

Institutional sales included a one-time payment from the merger of two clients. Morningstar didn't specify the amount.

Revenue from individual clients rose 32 percent to $20.4 million. Aspect Huntley, a research and financial publishing business, was a key contributor.

Sales to Morningstar's adviser clients, including products such as its Principia software, rose 31 percent to $24.4 million.

Morningstar had a 63 percent increase in revenue from international units to $12.3 million, with $3.2 million from its new properties.

``You need the international and Ibbotson filling the cup'' to supplement longstanding U.S. businesses, Oppenheimer's Loh said. The company generated $28.7 million in free cash flow in the quarter, which may lead it to consider more acquisitions or offer its first dividend, he said.

Loh expected Morningstar to earn 27 cents a share. The company owns a 35 percent stake in Morningstar Japan KK, which made an initial public offering in one of its subsidiaries in the quarter. The sale gave Morningstar a pretax gain of $1 million, which added 2 cents a share to the company's results.

Operating expenses climbed 38 percent to $61.3 million, led by higher compensation costs. Excluding bonuses, employee pay and benefits increased $5.7 million as the number of employees rose 25 percent to 1,400. The increase was due to the acquisitions and continued hiring in Morningstar's facility in China.

Morningstar this week introduced a Web-site tool allowing individuals to follow their own investment returns, and a retirement-income planner, which uses forecasting data developed by Ibbotson.

In August, Morningstar acquired the institutional hedge-fund and separate account database of InvestorForce Inc. The purchase will help Morningstar double its coverage of hedge funds. Mansueto said the upgraded information will be available to clients by December.