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Why the Pro Medicus share price popped 16% yesterday

The Pro Medicus Ltd  (ASX: PME) share price rocketed 16.14% yesterday to close at $30.58 per share as the top performer within the S&P/ASX200 Index (INDEXASX: XJO).

All of this came as the Aussie healthcare stock reported its full-year earnings to the market – so, what was so good that investors just had to buy?

Why the Pro Medicus share price exploded yesterday

In its full-year results for the year ended 30 June 2019 (FY19), Pro Medicus surprised the market with its strong earnings and projected growth figures.

The Aussie medical imaging group reported revenue a whopping 92% higher than FY18 figures at $50.1 million, while its net profit after tax (NPAT) climbed a tidy 48% over the same period.

Shareholders were also pleased with the group’s 45.3% net profit margin which is almost unheard of even amongst the top growth stocks on the market, while management still managed to announce a final dividend of 4.5 cents per share (cps).

Have I missed the boat on Pro Medicus?

While a 16% share price jump in one day is astronomical, there could still be further value in Pro Medicus shares at its current $30.58 per share valuation.

If the company can maintain its margins at or around the 45% mark, there’s no reason to expect the company can’t surprise again with its half-year results in February 2020.

With a strong $180 million of contracted revenue already locked in for the next 5 years, Pro Medicus could be pressing a claim to be the next Afterpay Touch Group Ltd  (ASX: APT).

What about Pro Medicus’ relative value?

It is true that for all of its potential, much of that is reflected in Pro Medicus’ current share price valuation.

As at yesterday’s close, the Pro Medicus share price is trading at an astonishing 250x earnings multiple, meaning investors are expecting some pretty serious earnings growth in the medium to long-term.

Personally, I think buying into any growth stock at or near the top of the cycle can be risky business, and I’d be angling my own strategy towards a cash flow tilt such as Commonwealth Bank of Australia Ltd  (ASX: CBA) to ride out any coming volatility.

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Kenneth Hall has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Pro Medicus Ltd. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended Pro Medicus Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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