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Rising Costs, Adverse Weather to Hit Cosan's Performance

Zacks Equity Research

On Jan 11, we issued an updated research report on Cosan Limited CZZ. The company’s performance is likely to be hindered by unfavorable weather conditions, and rising costs of sales and services.

Let’s illustrate these factors in detail.

Guidance Cut to Reflect the Impact of Decline in Fuel Demand

At Raízen Combustíveis, Cosan narrowed the EBITDA projections for 2018 to R$2.75-R$2.95 billion from the earlier projection of R$2.85-R$3.15 billion. The guidance reflects reduction in Otto cycle fuel demand. The Otto cycle fuel sales dropped 3% in third-quarter 2018, impacted by 2018World Cup and a high level of unemployment.

Unfavorable Weather Conditions to Affect Productivity

In the third quarter, Cosan recorded 3% year-over-year fall in sugarcane productivity due to lesser rainfall concentration. At Raizen, Cosan expects crushed sugarcane volumes of 60-63 million tons for crop-year April 2018-March 2019.

The company has trimmed estimates for sugarcane crushing at Raízen due to drier weather which hit productivity at some regions. Sugar volume produced is projected at 3.9-4.1 million tons for the period, which is lower than the previous guidance of 4.2-4.6 million tons.

Rising Costs a Concern

Cosan has been dealing with the adverse impacts of rising costs of sales and services. Cost of sales and services sold in the third quarter marked a 42% year-over-year rise. Further, its financial expenses were affected by the Brazilian real depreciation against the U.S. dollar, specifically the unhedged amount of the perpetual bond.

Share Price Performance

In the past year, Cosan has lost around 3%, while the industry has slumped 55% during the same time frame.



 

Zacks Rank & Key Picks

Cosan carries a Zacks Rank #4 (Sell).

A few better-ranked stocks in the same sector areIsrael Chemicals Shs ICL, Quaker Chemical Corp. KWR and The Mosaic Company MOS. All three stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Israel Chemicals has a long-term earnings growth rate of 9.5%. The company’s shares have gained 31% over the past year.

Quaker Chemical has an estimated long-term growth rate of 11%. Its shares have rallied 19% in a year’s time.

Mosaic has a projected long-term growth rate of 7%. Its shares have rallied 16% over the past year.

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