Cosan Is A Promising Brazilian Ethanol Stock

| About: Cosan Limited (CZZ)

When you land in Brazil, it is indeed a world of cane sugar. You can travel through literally hundreds of miles in the state of São Paulo and see only estates of cane sugar, with a few coffee and orange estates strewn in between. Of course these plantations can also be seen as virtual power plants (power plants in Portuguese are so called because they are able to generate their own power, and are energy- self-sufficient due to the use of bagasse - a by-product of sugar and ethanol - industrial processing with sugarcane being the raw material. Dozens of these estates belong to Cosan (NYSE:CZZ).

In this article, I shall discuss why you should pay more attention to Cosan and its operations, as it proves to be a wise investment option.

Why should you invest in Cosan?

Cosan is the largest Brazilian producer of ethanol and sugar, and also operates in other sectors such as chocolate drinks, gelatins, puddings, lubricants, greases, logistics and gas.

Now let us take a look at 3 important reasons why Cosan is an important Ethanol play.

1. Cosan produces about 2 billion liters of ethanol per year and 4 million tons of sugar. Ethanol is widely becoming one of the most important energy sources. Brazil, which is one of the largest energy consuming countries in the world, sees at least 25% of ethanol in gasoline that is sold across the country. Other than that, ethanol is also used as rocket fuel. Ethanol produces less harmful gases upon combustion and many environment advocates have begun to press on using ethanol as an alternative fuel.

2. The second and even more important reason is that Cosan is about to make a technological leap in its line of ethanol production. The second generation ethanol is no longer a dream. In Piracicaba, state of São Paulo, a research institute linked to Cosan has developed a technology that allows 30% more ethanol to be produced in sugar cane plantations. The current plants produce ethanol from sucrose, which is extracted from grinding cane sugar. With this new technology of second generation ethanol, any part of the sugarcane plant, including the leaves and bagasse, can be reused to manufacture ethanol. This new ethanol-production technology is more competitive and will encourage a greater interest among consumers as car manufacturers will begin to produce more ethanol-powered cars. When we consider the long term effects of this technology, we must bear in mind that this is something that will be beneficial to both the consumers from an economic point of view, as well as from an environmental point of view.

3. The third reason why I advise investors to consider Cosan is because it it has been purchasing and merging with several companies. It purchased downstream fuel portfolio from Esso in 2008. The fuel distribution plants will help it to ship its products across the world. In 2010, Cosan also announced a deal with Royal Dutch Steel, which will help it to distribute and market fuel across Brazil. These collaborations have strengthened Cosan to make more profits and sustain itself as a profitable company.

Cosan is undervalued

I strongly recommend you to buy shares of Cosan for these reasons: cheaper and cleaner energy, diversity and social responsibility in business, and a great earnings record Cosan has a market cap of $4.22 billion and an enterprise value of $8.76 billion. Its profit margin is 1.19% with a revenue of U.S. $ 14.79 billion. With a PEG ratio of 0.20, it is undervalued at the moment. Now is the right time to buy Cosan before it becomes expensive.

Cosan outshines its competitors

Noble (NYSE:NBL) is also eyeing the Brazilian ethanol industry. Not only in sugar, but also coffee and soya. This is part of the company's vision to invest solidly in Brazil and not lose competitiveness in key markets. Noble has also striven not to fall behind in energy technologies. With a market cap of $23 billion, Noble is certainly one of the largest energy companies in the world. It currently trades at $64 but with a PEG ratio of 1.48, it is definitely in the overvalued territory.

Pacific Ethanol, which is another competitor of Cosan has a production capacity of 200 million gallons per year. It struggled through 2012 and has not fared well in 2013 either. Its profitability is in the negative range, with a profit range of -1.82% and an operating margin of -1.39%. Obviously, Cosan is a better bet.


It is certainly the right time to enjoy the low prices of the shares of Cosan and make a sound investment decision. In the future, this stock will raise even more thanks to its amazing technological behind new energy sources. The second generation ethanol production is something that Cosan is very good at, and that should make you invest in this company.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.