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CZZ Upgraded on LT Growth Prospects

Zacks Equity Research

We recently upgraded Brazil’s sugar and ethanol producer, Cosan Limited (NYSE:CZZ - News) to a Neutral recommendation. The stock was previously rated Underperform by us.

Cosan, the largest sugar and ethanol producer in Brazil, ranks third in sugar and fifth in ethanol production in the world. Apart from its core operations, the company is also engaged in energy production from sugarcane bagasse and fuel distribution.

The upgrade was on the back of the company’s long-term growth prospects that uplifted our sentiments. However, the rating revision was restricted to Neutral only due to disappointing near-term results and guidance.

Cosan’s second quarter 2012 results were weak with net income plummeting sharply from R$251.5 million to R$63.2 million while revenue increased 44.3% year over year. Higher costs of sales and services in the quarter scooped majority of the benefits from the revenue increase.

In addition, guidance for the fiscal year 2012 was revised down by the company from its previous estimates to account for lower sugarcane volume crushed and lesser volume sold; lower ethanol volume sold and lower fuel volume sold.

Leaving aside the near-term concerns, the company’s long-term growth prospects look promising. Newly formed Raizen, a joint venture of the company with Shell, enables better access to ethanol consumer market and increases competitiveness in biofuels and fuel distribution businesses. Moreover, growth through acquisitions and other expansion strategies bodes well for the company.

The current Zacks Consensus Estimate for the fiscal years 2012 and 2013 are 90 cents and 85 cents, representing a year-over-year decline of 18.18% and 5.56%, respectively.

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