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Why the Spotless Group Holdings Ltd share price soared today

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Investors might be wondering why the Spotless Group Holdings Ltd (ASX: SPO) share price has surged 7.2% today, especially considering the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has fallen 0.8% for the day.

While that might seem impressive at first glance, it’s anything but.

Spotless Group is a market-leading provider of laundry and linen services in Australia and New Zealand. It also provides outsourced facility services, such as catering and cleaning. The group floated its shares on the ASX in mid-2014 at an issue price of $1.60, and the share price soon rose to a high of $2.51.

Today, the shares are trading for just over $1.14 per share. They hit an all-time low of just $1.04 during yesterday’s session but have managed to pare back some of those losses today.

So what happened?

In an update to the market last week, Spotless Group said the business was still performing well organically, but profit from new business wins had slowed due to “tighter economic conditions and tender decisions being delayed or deferred.”

Acquisitions are a big part of the Spotless Group’s growth strategy, having spent almost $100 million on business acquisitions in the latest financial year — $84 million of which was for goodwill (the premium being paid compared to the book value of the company itself).

In other words, integration of the new businesses into the broader group is taking much longer than first anticipated while synergies are not being recognised as yet. Group revenues will still grow strongly thanks to these add-ons, but profitability is expected to take a big hit.

In fact, Spotless Group advised that earnings before interest, tax, depreciation and amortisation, or EBITDA, is expected to remain flat compared to its 2015 financial year, while net profit after tax, or NPAT, is expected to fall 10%.

Should you buy?

Investors will no doubt be disappointed with Spotless Group’s performance recently but some may view the fall as an opportunity to buy.

Personally, I’m not tempted, at least not until the company can prove its ability to get these acquisitions right. Indeed, if integrating those businesses continues to be an issue, it will by no means be encouraging for the future of the company and the shares could fall even further than today’s price.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. You can follow Ryan on Twitter @ASXvalueinvest.

The Motley Fool Australia has no position in any of the stocks mentioned. 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 Bruce Jackson.

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