Cosan: Volatility In SEE Markets Only Adds To The Complexity

Brazilian conglomerate Cosan (NYSE:CSAN) is a complicated story in the best of times, as this company pursues a holding company structure to invest in a wide range of businesses, including its Raizen joint venture with Shell (SHEL) in sugar, ethanol, and retail fueling, its Rumo rail operations, and other businesses like natural gas distribution, lubricants, and land development. On top of this “chosen” complexity, the company is now also dealing with a more volatile environment for its core sugar, ethanol, and energy (or SEE) operations, with weaker ethanol prices in Brazil and more risk in the sugar market.

Cosan is a difficult stock to recommend in some respects, as there are a lot of moving parts to track and this isn’t the easiest investment for investors to assess. I do believe management has built a track record of value creation, but it looks as though the business will only get more complex and diversified over time. I do believe this pullback in the shares is an opportunity for investors who can look past increased near-term volatility, but this isn’t really a “sleep well at night” sort of stock.

 

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Cosan: Volatility In SEE Markets Only Adds To The Complexity

Cosan Batted Around By Commodity And Macro Challenges, But The Core Investment Case Remains Solid

Despite high fuel and commodity prices, the last six months or so have been rather mixed for Cosan (NYSE:CSAN), with the ADRs of this large Brazilian conglomerate down around 5% since my last article and modestly underperforming the Brazilian stock market. Relative to other publicly-traded ethanol plays like Sao Martinho and Adecoagro (AGRO), though, the performance has been a fair bit better, as Cosan’s diversification in areas like lubricants, rail, and natural gas distribution have helped offset a roughly 25% - 30% decline in ethanol prices since April.

Cosan is always going to be a complex, challenging company to model and own – not only due to its participation in commodity markets, but also its holding company structure and diverse operations. That said, this management team has created value for shareholders over time, and I believe they will continue to do so. Between organic and inorganic growth opportunities, I continue to expect mid-to-high single-digit long-term revenue growth from Cosan and believe these ADRs should trade in the low-to-mid $20’s.

 

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Cosan Batted Around By Commodity And Macro Challenges, But The Core Investment Case Remains Solid

Cosan: Well-Run, Undervalued, And Leveraged To Growth, But Punishingly Complex

 

If you’re the sort of investor who enjoys building your own models and getting into the nitty-gritty details of a business, Cosan (CSAN) will either be your dream investment or it will lead to you wearing one of those special jackets with the extra-long sleeves that tie in the back. While Cosan is a well-run company and management has shown themselves to be sound stewards of capital, it is a complex, increasingly expansive holding company with operations in a wide range of hard-to-forecast/hard-to-model businesses.

With oil prices spiking and sugar prices quite high as well, the Raizen operations should have few issues on the price side, and I still like the long-term outlook for Rumo. In the meantime, management is taking a more conservative approach with its capital allocation priorities, largely in response to what management described as the “macro-political” situation. Between Cosan’s varied operations, I believe the ADRs are worth around $21 to $25, though I will again warn that while Cosan provides good exposure to multiple attractive businesses, the financials are complex and the company is exposed to multiple drivers (weather, global commodity prices, et al) that management cannot control.

 

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Cosan: Well-Run, Undervalued, And Leveraged To Growth, But Punishingly Complex

Cosan Leveraged To Higher Sugar Prices, Recovering Fuel Demand In Brazil, And Aggressive 'Self-Help'

It’s been some time since I’ve written about Cosan SA (CZZ) (“Cosan”) and this Brazilian conglomerate has certainly been busy in the meantime – executing a complex corporate restructuring and a large acquisition, as well as remaining on the hunt for refinery and pipeline opportunities and possibly contemplating future IPOs as well.

Right now Cosan SA ADSes trade on a when-issued basis (CSAN-WI), with the eventual symbol to be CSAN (the CZZ shares are gone). While many financial information sites haven’t updated that yet, they are still available for trade, and one CSAN ADS is equivalent to one Cosan SA (CSAN3.SA) share.

Cosan is a complicated, aggressive company, and one that is also exposed to multiple global commodity markets. This is not a widows-and-orphans stock, nor one suitable for investors daunted by complexity. That said, I believe the management team is quite good and I’m bullish on the underlying growth opportunities in Brazil’s sugar, ethanol, gas, and rail markets and Cosan is a good play on those. Current valuation is so-so – I see modest upside right now, but with Brazil’s economy likely to recover after the pandemic, the outlook for ethanol should improve.

 

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Cosan Leveraged To Higher Sugar Prices, Recovering Fuel Demand In Brazil, And Aggressive 'Self-Help'

Adecoagro Downsizes Its Dairy Aspirations And Seems More Focused On Value

Adecoagro (AGRO) has struggled over the past year, with the shares down more than 25%. Plunging sugar prices, a weaker Brazilian currency, and concerns about the Brazilian economy are certainly major factors in that performance, but they aren’t the only concerns in play with Adecoagro. These shares have done almost nothing for investors over the past five years (which is at least better than Cosan (CZZ)), as investors have questioned management’s focus on true shareholder value creation.

Recent developments may be a step in the right direction. Not only did management outline a path toward dividends at a recent sell-side conference, but the company is also being more clear about its intentions to grow FCF and be a better steward of shareholder capital, including a significantly scaled-down offer for SanCor assets in Argentina. While there is still ample skepticism regarding this company, the share price seems to reflect a pretty dire long-term scenario.

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Adecoagro Downsizes Its Dairy Aspirations And Seems More Focused On Value

Adecoagro Continues To Invest In Growth Amid Brutal Commodity Pressures

My biggest issue with investing in Adecoagro (AGRO) has always been its vulnerability to commodity price swings, and those swings have been hammering the company and the stock over the last year. At the same time, management has continued to invest in projects that it believes will deliver meaningful long-term growth – the latest being the acquisition of Argentina’s largest dairy processor. 

Adecoagro has shown that it can run its diverse operations well, but efficient operations in sugar, ethanol, and farming can only go so far in the face of commodity price pressure. With that, the shares do still look undervalued, but the company’s exposure to commodity price risk may be too large for some investors.

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Adecoagro Continues To Invest In Growth Amid Brutal Commodity Pressures

Despite Ongoing Operational Improvements, Cosan Still Undervalued

Following and modeling Cosan Ltd. (CZZ) is a little like training for endurance sports - you spend a lot of time while you're doing it wondering why you're bothering to do it. After all, there are two share classes, a somewhat complicated holding company structure, and many commodity moving parts to account for in an analysis. With the shares up more than 30% over the last year and close to 250% from the 2015 lows, though, I think you can certainly argue that there has been some gain for shareholders willing to take on that pain. Better still, I continue to see upside in these shares from both operational improvement and a shrinking discount to the underlying value.

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Despite Ongoing Operational Improvements, Cosan Still Undervalued

Weak Commodity Prices Distract From Adecoagro's Positives

One of the frustrating things about investing in commodity companies is that individual companies can run themselves exceptionally well and still see those benefits largely chewed up adverse moves in the commodity markets they serve. Such has been the case with Adecoagro (NYSE:AGRO). Although Adecoagro has an enviable cost structure in both its sugar/ethanol and farming operations, weaker prices have undermined the company’s earnings power and pressured stock throughout 2017.

I still believe in the quality of Adecoagro, and I still believe that the shares are undervalued based on the company’s long-term FCF potential. Unfortunately, the vagaries of the commodity markets are such that it’s difficult to feel particularly strong conviction about any short-term forecast. That may not bother long-term investors who appreciate a solidly-run business with low costs, good global competitiveness, and attractively long-term growth drivers, but less patient investors may find the commodity-induced volatility is too much bother.

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Weak Commodity Prices Distract From Adecoagro's Positives

Seeking Alpha: Cosan Is Complex, But Built To Win

The last year has been a bad one for Cosan Ltd (NYSE:CZZ). Despite strong positions in sugar, ethanol, fuel distribution, and logistics, a struggling Brazilian economy, a weaker Brazilian currency, lumpy results, and ongoing uncertainty over the complexity of the corporate structure has taken a toll on the shares. Down more than 40% over the past year (and since my last article on the company), Cosan seems unfairly maligned and overly discounted, but this will likely never be a stock suitable for investors who can't handle risk and volatility.

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Cosan Is Complex, But Built To Win

Seeking Alpha: Adecoagro's Diversity Sweetens The Value

These are rough times for both agriculture and Brazil, but Adecoagro (NYSE:AGRO) may yet be a stock that investors want to look at today. Calling a bottom in agricultural commodities is a fool's errand, but the company has more going for it than just the prevailing price of corn or soy. Adecoagro has established a quality sugar/ethanol/cogeneration operation in Brazil, and should be well placed to benefit from improving conditions. It is also leveraged to the extremely discounted farmland values in Argentina, and can benefit if a new government later this year pursues a more rational set of economic policies.

Adecoagro hasn't outshined Cresud (NASDAQ:CRESY) since mid-July of 2013 (when I wrote up both stocks as Top Ideas), but a 60%-plus improvement in the stock price since then still isn't bad. I believe that it is more than 10% undervalued just on the basis of its sugar/ethanol operations, and if economic reforms in Argentina allow the real underlying value of the company's farmland there to come to the surface, a fair value in the mid-to-high teens is not out of the realm of possibility.

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Adecoagro's Diversity Sweetens The Value

Seeking Alpha: Adecoagro Showing Some Life

I know there are at least a few Seeking Alpha readers who own Adecoagro (AGRO) for the potential this company offers in becoming a bigger player in Brazil's sugar and ethanol industries and realizing value growth in its land holdings. I also know that they've gotten a little frustrated with the stock's performance as the company has muddled through worries about crop prices, weather, and issues in Argentina.

The shares did well from the summer of 2013 into the fall and then went to sleep for about half a year. More recently the shares have headed higher again, as Brazilian equities in general have come around and sugar/ethanol producers like Cosan (CZZ) and Sao Martinho (OTC:SRTOF) have rebounded as well. With sugar prices and ethanol prices looking pretty solid, Adecoagro could be in for a better year, though currency moves could create some considerable choppiness in the numbers.

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Adecoagro Showing Some Life

Seeking Alpha: Cosan Continues To Build A Diverse Set Of Businesses

Cosan Ltd (CZZ) continues to be a frustrating stock, even though it's connected to a good collection of Brazilian businesses. While the merger/spin off involving America Latina Logistica (OTCQX:ALLAY), Cosan SA, and Cosan Logistica is a little complicated, it will have the end result of improving Cosan's logistics operations and simplifying the corporate structure of Cosan Ltd. With quality operations in sugar/ethanol, fuel distribution, natural gas, logistics, lubricants, and farming, Cosan Ltd remains a good stock to consider as it has lagged the rally in Brazil.



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Cosan Continues To Build A Diverse Set Of Businesses

Seeking Alpha: Poor Yields Sap SLC Agricola

Three out of four will have to do. My Alpha-Rich calls to buy South American ag companies Adecoagro (AGRO) and Cresud (CRESY) have both worked out well, with performance well ahead of the S&P 500, and my relative bearishness on BrasilAgro (LND) has likewise worked out with a share price decline of 10%. SLC Agricola (OTCPK:SLCJY) is the exception and the stock that has not performed as I had thought it should. While the 8% return from my call has basically matched the performance of the Bovespa, it lags the performance of the S&P 500 and the performance of the Brazilian-listed shares (SLCE3.SA), which have risen about 18%.

Blaming currency moves and/or skittishness about land values in Brazil is fine to a point, and I do think that the disappointing cotton harvest played a significant role. Management isn't really changing much about their operating philosophy, though the company's decision to lease land instead of buy it does give some reason for pause. I do believe that SLC Agricola remains one of the best-run ag companies in the market and I continue to believe that the shares are undervalued at these levels.

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Poor Yields Sap SLC Agricola

Seeking Alpha: Adecoagro's Discount Remains Stubbornly In Place

All things considered, I'm happy with how Adecoagro (AGRO) has done since I made this stock an Alpha-Rich pick back in July. The shares are up about 19% since then, well ahead of the 8% rise in the S&P 500, the nearly 12% rise in the Bovespa, and the 6% rise in the iShares Brazil Index ETF (EWZ). This appreciation has come despite a drought-induced disappointing crop yield for 2012/13 and a sharp slowdown in the rate of appraised land value accretion, as improvements in sugar and ethanol have certainly helped.

Even with a double-digit improvement in Adecoagro's share price, I'm still pegging this stock as a market-beater from here. The nature of growing crops is inherently risky, and the steep price for Argentine CDS shows that there are definitely good reasons to discount the value of Adecoagro's Argentine farmland. Despite that, I believe this company's farmland is still undervalued, I believe the company will continue to grow its profitable sugar and ethanol business, and I'm willing to bet that droughts are not going to occur every year. With that, I believe these shares are still at least 30% undervalued.

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Adecoagro's Discount Remains Stubbornly In Place

Seeking Alpha: Adecoagro - A Solid Operator With Argentina And Ethanol Risks

When I wrote on SLC Agricola (SLCJY.PK) a couple of weeks ago, it was just the first of a handful of Latin American farming names leveraged both to growing international food demand and rising farmland values in Brazil. SLC Agricola is not the only one that looks undervalued, though, as Adecoagro (AGRO) looks even more undervalued than SLC Agricola.

There are reasons for this undervaluation, though. For starters, a substantial percentage of the farmland that Adecoagro owns is located in Argentina - a country undergoing significant economic turbulence and a lot of uncertainty regarding financial/tax rules and regulations. What's more, while about 70% of Adecoagro's 2013 EBITDA is likely to be generated in the more stable country of Brazil, the nature of the business there (sugarcane and ethanol) is volatile in completely different ways.

All told, I believe Adecoagro is significantly cheaper than SLC Agricola, but that at least a portion of that difference has to be viewed as compensation for the significantly different risk profile. Even with some sizable haircuts to valuation, though, I believe Adecoagro shares are worth about $10, or 60% more than today's price. Investors considering Adecoagro need to be aware of the risk that flagging crop prices and rising global rates could significantly slow land value appreciation and/or that ethanol prices could reverse, but risk-tolerant investors may find the balance here still very favorable.

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Adecoagro - A Solid Operator With Argentina And Ethanol Risks

Seeking Alpha: SLC Agricola - Come For The Crops, Stay For The Land

It isn't easy running a farm nor, by extension, a farming business. Couple that with extensive year-to-year volatility, and that may well be why there are no publicly-traded U.S. farming companies - forcing investors to make do with input companies like Mosaic (MOS), DuPont (DD), and Deere (DE) or crop/commodity-specific ETFs. That's really too bad, though, because for all of the year-to-year risk and volatility in farming, the long-term potential of land value appreciation can be considerable.

That makes Brazil an interesting opportunity. Unlike the U.S., there are multiple publicly-traded farm operators in Brazil, including Adecoagro (AGRO), Brasilagro (LND), Cresud (CRESY) (which is technically an Argentine company, but gets 70% of its EBITDA from Brazil). Last and by no means least is today's subject SLC Agricola (SLCJY.PK) - one of the largest, most productive, and most interesting agricultural companies in South America. While investing in agriculture and land development is by no means for the weak-hearted, and this is a very illiquid stock at present, the potential in these shares may be worth the risk to some investors.

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SLC Agricola - Come For The Crops, Stay For The Land

Investopedia: Afer A Strong Recovery, What Moves ADM From Here?

I've had a love/worry relationship with Archer Daniels Midland (NYSE:ADM) for a while now, as I do believe that the Street is often too negative about a business that is admittedly very low-margin and unpredictable. With the stock up more than one-third from its November 2012 lows, though, it is harder to argue that the stock is unfairly neglected by the Street. Longer-term opportunities in Asia will take time to materialize, which makes a strong U.S. crop and the speedy close and integration of GrainCorp all the more important.

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Investopedia: Adecoagro Has Taken Its Lumps

Adecoagro (NYSE:AGRO) gives investors direct exposure to the ups and downs of farming, and that hasn't been such a good thing over the past year. While nobody seems to seriously doubt that Argentina and Brazil will be major global breadbaskets for many years to come, results and sentiment have been dented by a significant drought and major political uncertainty in Argentina. Weather-related turbulence is a core risk to this company, but investors who can patiently stay focused on the long-term potential should consider these shares today.

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Investopedia: ADM Working Through A Lull

One quarter ago, I opined that Archer Daniels Midland (NYSE:ADM) looked like a good stock for patient investors. With the stock having doubled the return of the S&P 500 over that brief time period, so far so good. ADM's business is always going to be a volatile, commodity-driven enterprise, but the company does earn long-term economic returns on an asset base that would be extremely difficult (and expensive) to replicate.

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Investopedia: Cosan Could Look A Little Sweeter In 2012

Ethanol has a dicey reputation with investors. The petroleum alternative has enticed more than a few true-believing green investors into thinking it's somehow more than a commodity, before dashing their dreams and denting their net worth. Brazil's reputation is scarcely better, as investors have had to ride the ups and downs of a promising, but very volatile, market for years. Combining these two into one investment may seem like lunacy to some, but Cosan (NYSE:CZZ) may be a name to consider for 2012 and beyond.

One of the Biggest, One of the Best 

Cosan is one of the largest sugar and ethanol producers in the world and the largest sugarcane crusher. The company operates 24 mills, two refineries and two ports in Brazil and currently has a little over 60 million tonnes of crush capacity. In fact, about 5% of the world's ethanol comes out of Cosan facilities.

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