Thursday, March 28, 2019

A Current AIM International Equity Holding: Cosan Limited Class A (CZZ, $11.99): “Not So Renewable” By: Andy O’Neill, AIM Student at Marquette University

Cosan Limited Class A (CZZ, $11.99): “Not So Renewable - Probably Not a Part of the Fund in the Future - Too Much Uncertainty in Brazil”
By: Andy O’Neill, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

Cosan Limited Class A (NYSE:CZZ) works in producing, distributing, and transporting renewable energy sources. It operates out of Brazil and does a large majority of their work in that country.

• Cosan’s growth has been tremendously fast over the last six months, but have become very volatile.  
• Price of sugar bouncing back has helped Cosan enjoy this large rise in price.

• Argentinian economic distress has impacted their ability to utilize sugar and oil refineries.

• Biogas availability dropped 16% in 2018 due to reduced crushing.

Key points: 

Cosan Limited is enjoying a 52-week high currently. The stock is flourishing, as they have been up almost double since they bottomed out 6 months ago. They have grown 38% YTD, which has helped them recover from a previous six month downturn and grow 11% over the last twelve months. Their net income has gone up by 55% from 2017 to 2018, and they have been experiencing considerable top line growth as well.

CZZ’s stock price is dependent upon sugar prices. As one of its sources for renewable energy uses mainly sugar, they could likely explain their downturn over the second and third quarters of 2018 to the prices of sugar going down heavily. From March to September, prices of sugar dropped from $0.13 to $0.10 per pound, making a 23% decrease. While that is not the only reason that they have dropped, it was a large contributor. In September, the price of sugar skyrocketed back up to $0.14 per pound, helping CZZ increase heavily. Currently, the price of sugar is at $0.125 per pound, which is slightly lower, but still much higher than it was earlier.

Unfortunately for Cosan, they have had to deal with economic distress in Argentina, as the country has had their currency depreciate, which was not helpful for Cosan. This has led them to not be able to utilize their refineries for sugar and oil production in Argentina, with utilization averaging 75% between them. Their normal level of utilization is projected to be around 85% if and when the Argentinian economic distress is resolved.

Cosan undergoes crop crushing, which is a process used to make ethanol and other biogases. Their crushing numbers were down 2% this year, likely due to bad weather. However, this decrease caused a 16% decrease in products sold. This is a large issue for Cosan, since they rely heavily on their crop crushing to generate revenue through biogases, and if weather does not cooperate or they aren’t able to produce for other reasons, their revenue will be impacted greatly.

What has the stock done lately?

Over the last three months, Cosan stock has increased rapidly, approximately 45%. They have had two straight quarters of good earnings reports, as well as huge earnings growth over the past year. Their 2018 net income grew 55%, largely due to large decreases in interest expense and unusual expenses. This will likely not be the case again, as their sales and EBIT are only growing at 8% and 4% respectively.

Past Year Performance:

CZZ has increased 6.79% in value over the past year, but the stock is on the up and up since September, as they have increased 86% since then. Their book value is much lower than their market value, as their book value per share is $6.97, or only 58% of market value. This is likely due to the meteoric rise in market value over the past 6 months, but still something to be careful of throughout the rest of the holding period.

Source: FactSet

My Takeaway:

While the stock is rising at a very fast pace, and has been for the last six months, I don’t believe that it is still a buy. I believe that they may be very close to the end of their investment horizon. While they have reported large bottom line growth, it does not come with large top line growth, and they have been underutilizing their refineries, with no clear plans for improving that utilization. I believe that the stock is getting a little overvalued with their recent surge, and a downturn may be coming in the future.

Source: FactSet