Why the Medibank Private Share Price Soared on Friday

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What Happened to Medibank Private Ltd’s Share Price?

Shares in health insurer Medibank Private Ltd [ASX:MPL] enjoyed a sensational day on Friday, bucking the trend of a weak Aussie stock market to close up more than 13.4%. In one day, Medibank has regained all of its share price losses from the past four months.

Why Did This Happen to MPL Shares?

Medibank has just announced its result for the year ending 30 June 2015. The firm beat most analysts’ forecasts, posting net profit that jumped to $285 million — more than double the figure from the previous year.

Australia’s biggest private health insurer said its premium revenue rose 5.1%. It can thank government-approved premium increases for that.

Today’s strong price action will relieve ‘mum and dad’ investors who paid $2 per share in last year’s Medibank float. Earlier this week, the MPL share price closed below $2 at $1.99 for the first time. For now, investors seem to have a new appreciation for Medibank’s federally ‘encouraged’ profit growth.

What Now for Medibank Private Ltd?

Medibank’s price history since listing on the ASX should show you that this is by no means a low-risk investment. You should note that Medibank’s growth in membership is relatively lacklustre and weaker than growth in the broader market. That suggests Medibank’s competitors are winning over its customers.

What’s more, Medibank is in a fierce fight with private hospital operator Calvary Health Care over a range of affordability and care issues. With the doctors’ lobby attacking Medibank, there’s no telling how the fight could impact earnings.

Although Medibank Private’s business model is solid, Friday’s big share price move means the stock is now pricing in plenty of earnings growth. Lofty expectations can be hard to meet, and when a pricey stock misses them, the stock market can turn savage.

For deeper analysis on the Aussie stock market and global economy, keep an eye out for my essays in Money Morning — Australia’s biggest free daily financial e-letter.

Cheers, Tim Dohrmann
Editor, Money Morning

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