 Good day fellow investors and welcome to the Sunday Stock Analysis. Today we're going to analyze new world brands and I'm going to discuss three key concepts to understand when investing. That is goodwill, an acquisition strategy and a turnaround investing strategy. Buffett never likes turnarounds so it's important to see okay what's going on, what happened to new world and why it is such an interesting story but if you don't like the company we can still learn so much about investing here. Let's start. So for those who are not familiar with new well it has a lot of brands and probably we use something from new well at least once a week, if not even once a day. Very American company so if you are not from America you might not know some of the brands. When such a company with so many strong brands gets into trouble one must always look at whether it's an opportunity or a trap. The price to book ratio is 0.91 however there is goodwill that I'll discuss later. The price to earnings ratio is 5.64 don't get confused because it's distorted by income tax provisions due to the change in the income tax however the forward price to earnings ratio is still low just at 10.78 which is a real bargain when compared to other stocks. However let's look at the risk reward and let's see first what happened to new well. So if we look back at the stock price the stock price was above 50 not even a year ago but if we take a longer-term perspective the stock was even at 5 in 2009 and 11 in 2011. So there is a lot of volatility and you can always see something like this go back to the previous values because you have to see okay what pushed the stock higher and what is Wall Street focusing on. Up till 2016 the company was doing good but as Wall Street always expects higher earnings growth growth growth growth growth the management sometimes does really stupid things things that they don't understand they think it's smart because an investment banker will convince them that any acquisition is so smart because he gets the fee but then the management gets convinced the investors get convinced because even investors are greedy about growth and then they do some things that they don't understand very risky like acquiring Jardin for 13 billion. Jardin is a company that owns various brands of which one is called an outdoor gear. When such an acquisition is made the management counts on synergy and savings the goal was to unlock 500 million in cost efficiencies and savings expand the company's global reach and being made immediately accretive to earnings. Not everything worked out as the company planned and that's usually the case especially in such stretched acquisitions when a company that's not that big doesn't really know how to take over how to merge into another company different cultures different it's it's it's an art to merge something so it's again a risky but investors get very very enthusiastic about those synergies and combinations. When a company buys another company you have to be enthusiastic because if they buy it on the chip not about the synergies just look at the synergies as a bonus that might happen but very often doesn't happen which makes a risky play to invest into a merger and acquisition. Nevertheless the message here is to really differentiate between companies that have there there are a lot of them that have been growing at any cost through acquisition mergers and piling on debt to do that so you have to really be careful about those companies because when things start to unravel when interest rates go up when the synergies don't come from the acquisitions then those stocks are the in the biggest trouble and there is a big difference between a stock that grows on acquisitions and the stock that grows on organic high return on investment capital growth that's the one you want to hold for the long term. Nevertheless let's go back to Newell and its price to book value of 0.91 which many see it as a bargain. However Newell's tangible book value would be only two dollars per share and the price to tangible book value will be 13 because when a company acquires other companies it usually pays a premium as nobody would want to sell something at a fair price. The difference between what the company pays and the book value of the assets is called goodwill and it's recorded on the balance sheet of the acquirer. However in the case of Newell when the acquisitions don't work as planned one must impair that estimated goodwill which is exactly the place where Newell is now as it plans to sell brands of about 10 billion and we'll see how much impairment will there be on the 13 billion that is goodwill on the balance sheet. Now in things go well Newell hopes to use the proceeds of the sales for buybacks at these low prices and about 45% for debt repayment. If all goes in splint EPS for 2018 should be between 265 and 285 which gives a forward price earnings of around 10 but the company should spend 5.5 billion in buybacks over the next few years which is a huge amount more than 40% of market cap and that should give some protection to the stock price which is something very interesting. However the company plans a lot of divestitures and Newell will be much smaller companies revenues will be down 40% and operating income will be down 50% so they are selling what doesn't fit but they are selling profitable companies from what I see here. With operating income down 50% we can expect profits to be around one dollar per share however 10 billion coming in from the divestitures should give 25 dollars per share to distribute between debt and buybacks. At current prices repurchases would remove 42% of outstanding shares bringing down the number of shares outstanding from 488 million to 284 million and improving significantly EPS pushing it close to 2. Further 4.5 billion should have long-term debt and lower interest payments additionally increase earnings. If the management succeeds in the plan the company is now a bargain. Further there is car icon stepping in he has now four members of the board he's famous for regarding most American corporate management as idiotic and he sees as them as the biggest problem to US growth. He bought us taking the company and we'll see how that will work out however you must understand icon and his investment style he will invest in such workout situations and then he's happy if five or seven of the works out work out well. In the long term he knows that he will probably break out even or at some loss from some stocks but he will do very well on the other companies that he manages to turn around and improve. So with new well you have also to understand that there is risk nothing is a guarantee but there is also upside especially upside when car icon is in the game and he will try to revert to reformulate this divested divest partly of the company and increase the stock price to sell it to somebody else to get his return probably. I will just finish on the cash flow the trailing free cash flow of the company is around 400 million where the company pays a dividend of 0.92 per share or 448 million which means more debt is needed to stay in the business however that might change in the future. So to conclude new well has had a share of problems when such a company has problems you never know if that will continue so you must expect okay what's the worst that can happen the buybacks are there and they say they will do it so when somebody announced something like that you might want to take advantage of it like when the Fed said we are buying securities look at what happened to the SAP500 if they now spend 30% of market cap 40% on buybacks well that should at least save the stock from bleeding. So that's very interesting try to time it if you are into such let's say swing trades with icon or without icon. Thank you for watching looking forward to your comments about this risk reward estimation and what can happen what do you think what are the probabilities of new well managing the turnaround doing the buybacks increasing the stock price and the probabilities of the trouble continuing a lot of impairments lower sales lower growth etc etc so see you in the next video and check in the link below more of my research if you're interested and if you like the risk reward approach to investing