With its newly announced partnership with Cosan ADR (NYSE: CZZ), the world’s third largest sugar producer, Royal Dutch Shell (NYSE: RDSA) has taken a bigger step into biofuels than any oil major has ever attempted.

The $12 billion joint venture into ethanol includes about 75% of Cosan’s assets, including its sugarcane processing mills, co-generation power plants, ethanol trading company and 2 billion liters of annual ethanol production capacity, which just happens to be the second largest amount in the world.

In return, Shell will pay $1.62 billion for a half-stake in Cosan’s core asset base, contributing an additional 2,740 gas stations and other fuel distribution assets in Brazil. Those measures guarantee control of 4,500 stations in the Latin-American country and makes Shell-Cosan its third largest fuel distributor.

So even though other formidable oil companies like BP PLC (NYSE: BP) and Petrobras, and commodities trading companies like Bunge (NYSE: BG) have already ventured into the Brazilian ethanol industry, Shell and Cosan still have plenty of room to thrive and profit.

A Well Made Match

Cosan is the fifth largest ethanol producer and one of the world’s leading ethanol exporters, in addition to the nearly 60 million tons of sugar it processes per year. And as I mentioned back in July, it really made out in the wake of India’s dreadful sugar crop and rising global demand.

The company picked a good time to monetize its assets, clearing part of its $2.5 billion net debt as it did. And while the deal with Shell won’t immediately add to its existing sugar cane capacity, it does give it an immediate, deep-pocketed partner right when many of its rivals are vulnerable to takeovers.

Shell profits just as much from the partnership. It already has contributing stakes in Iogen and Codexis, two companies actively involved in producing fuel from non-food crops. But with second-generation biofuels still years away from practical production, sugar cane ethanol continues to stand out as the greenest alternative, emitting 90% less greenhouse gases than gasoline.

It’s also one of the most profitable and could bring in even more revenue in the future if western governments impose even tighter emission standards. So while ethanol only accounts for 7% of total, global gasoline demand right now, it should rise rapidly in the years ahead.

And Shell now has easy access to the business.

Shell and Cosan’s Vision

The venture combines Shell’s vast global distribution network with Cosan’s production capacity, a combination they hope will more than double ethanol output from 2 billion liters per year to 5 billion through organic growth and takeovers.

Of course, as with any other business idea, there are obstacles in the way, including U.S. and European trade barriers that get in the way of Shell and Cosan’s goal of global exportation.

So they plan to focus on Brazil for now instead, where their retail fuel network demands 3 billion liters of ethanol annually, a full billion more than Cosan can produce alone. It’s a huge market for biofuels, since 90% of all new vehicles have flex fuel engines that run on gasoline, ethanol or any mixture of the two. Naturally then, demand for ethanol has increased 15% – 20% annually since 2003.

The two companies should succeed in their global schemes too, eventually fueling more than just automobiles. For example, Brazil just opened the world’s first ethanol-fueled power plant with the help of Petrobras ADR (NYSE: PBR) and General Electric (NYSE: GE). And it’s in talks with Japan to develop biofuels power generation over there as well. Those markers of the changing times indicate increased demand for Shell and Cosan down the road.

In fact, as long as the world depends on first generation biofuels, Brazilian ethanol should remain the most sustainable and the most commercially viable. And Shell’s commitment to that field could eventually pave the way for second-generation fuels. When that happens, Brazil will doubtlessly continue as the world’s lowest-cost producer of biomass and an extremely relevant player in the game.

Shell and Cosan have situated themselves perfectly in a country that shares their goal of becoming a major ethanol exporter. That placement, along with their individual and combined skills, puts them in an ideal situation going down the road into a green future.

Good investing,

Tony Daltorio

View original at: Investment U

(CZZ) Shell and Cosan Strike A Sweet Deal

Whether Wall Street analysts and individual investors know it or not, emerging market consumers have a growing appetite for quality goods, a fact that big name brands took notice of quite a while ago.

Cadbury ADR (NYSE: CBY), for example, committed three years of research and development to creating the newest version of its Dairy Milk chocolate bar, which it recently unwrapped in Mumbai, India. By doing that, it directly combated the idea that emerging markets only care about cheap, made-to-measure products.

As a Cadbury spokesperson aptly said: “There is a huge set of emerging consumers who want world class products.” The company knows that for a fact too, considering that it worked for years to gain control of almost two thirds of the chocolate market in India. And outside competitors like Kraft Foods (NYSE: KFT) respect that position enough to pay top dollar for it.

Similarly, Harish Manwani – who manages Unilever ADR (NYSE: UN)’s emerging market portion – has increasingly launched new products in the developing world over traditional consumer hotspots. That includes the company’s Clear brand shampoo, an anti-dandruff product launched in China more than two years ago before expanding into over 30 other countries, including Russia and Brazil.

Beauty and Brazil: The Emergence of 20 Million Consumers

Avon Products (NYSE: AVP) knows the value of emerging markets as well, particularly in Brazil, where over 20 million consumers have emerged from poverty over the last six years. The growing middle class wants to spend and Avon wants to help them do just that, especially since the country has quickly become the world’s third largest beauty products market.

With the obvious consumer slump in the U.S., the American-based company turned to Brazil instead, successfully turning it into its biggest market as of last year’s third quarter. The company’s one million plus representatives within the country accumulated $1.67 billion in 2008 alone, second only to Natura, which made $2.1 billion.

And considering that only 40% of Brazilian women own lipstick, both companies still have a lot more room to grow.

According to Abihpec – the cosmetics industry association – the market for beauty products in Brazil has risen steadily by more than 10% each year since the mid 1990s. That makes sense considering how women’s roles within the country have changed over that time period. As they join the workforce in larger numbers, they naturally spend more money on themselves.

Emerging Market Consumer Confidence

Even while consumer confidence continues to waver in Europe, the U.S. and Japan, Bharat Puri, who works for Cadbury’s India division, points out how emerging markets “have an amazing optimism about the future.”

That’s why international drink company Diageo ADR (NYSE: DEO) decided to tap into even the most underdeveloped markets, like Nigeria. And so far, the strategy appears to be working, considering that the country recently overtook Ireland as the second biggest global market for Guinness beer and ale.

The corporation credits much of that growth to its advertising campaign themed “Greatness,” which portrays a prosperous future for African men – a larger message that emerging markets everywhere happily subscribe to. And it’s that very optimism that makes these countries’ chances so spectacular.

Investors should adopt a similar attitude when it comes to the companies feeding off of that sentiment if they want an equally optimistic future.

Good investing,

Tony Daltorio

View original at: Investment U

(CBY) Emerging Market Consumers: These Companies Are Set to Profit

However, net sales for the quarter were flat year-over-year, increasing 0.4% to $1.5 billion as favorable pricing was almost fully offset by volume declines associated with pricing elasticity, unfavorable foreign exchange and the decision to discontinue certain premium chocolate products. Management stated that core brands such as Kisses are responding to the investments in advertising (which was up approximately 50%), in-store programming and merchandising. In the channels measured by syndicated data, U.S. market share during the third quarter was flat while up 0.3 points year-to-date.

Management also provided an update on the Global Supply Chain Transformation initiative. The company recognized total business costs of $602.7 million year-to-date. Management now expects total pre-tax charges and non-recurring project implementation costs for the global supply chain transformation program to be in the range of $640 million to $655 million, including estimated pension settlement charges in 2009 and 2010.

The company is making the required consumer investments for Halloween and the upcoming holiday seasons. Management is currently executing Halloween-specific seasonal promotions, merchandising and advertising activities.

Additionally, Hershey’s is also planning an increase in advertising in the fourth quarter, and expects fiscal 2009 advertising expense to increase approximately by 50% compared to 2008. Management believes that this investment will benefit the company’s everyday and seasonal business in the near term and into next year.

Gross margin for the quarter expanded 604 basis points (bps) to 39.7% versus 33.7% in the prior-year quarter. The increase was primarily driven by favorable pricing, Global Supply Chain Transformation program savings, and productivity gains, which more than offset the impact of higher input costs. The operating margin for the quarter also expanded 407 bps to 18.8% from 14.8% in the comparable prior-year quarter.

The company had cash and cash equivalents of $119 million and a debt-to-capitalization ratio of 70%.

Based on the results year-to-date, management raised its guidance for fiscal 2009. Net sales growth is now expected to be in the range of 3% to 5%, compared to 2% to 3% stated earlier. Furthermore, management expects commodity costs to moderate and fall below the $175 million target stated earlier.

The company plans to continue investing in the core brands in the U.S. and in key international markets. Advertising expense is now expected to increase by 40% to 45% compared to 20% to 25% per previous expectation.

Annual earnings are now expected to be slightly above the long-term range of 6% to 8% due to the expected decline in commodity costs and benefits from higher advertisement spending.

Management also provided an outlook for fiscal 2010. Hershey’s expects the economic environment in the U.S. and international markets to continue to be challenging. However, management continues to focus on and make appropriate investments in the core brands and expects 2010 net sales growth to be within the 3% to 5% long-term objective.

Although quite early, earnings for fiscal 2010, given the company’s current investments, marketplace performance and cost structure, are projected to be within the long-term objective of 6% to 8%.

Zacks Investment Research
View original at: Zacks.com News Feed

(HSY) Hershey’s Beats Estimates – Raises Guidance

Company Description

Hershey Co. is the largest producer of quality chocolate in North America and a global leader in chocolate and sugar confectionery. Headquartered in Hershey, Pa., The Hershey Company has operations throughout the world and more than 12,000 employees. With revenues of more than $5 billion.

Bullish Forecasts

The company is seeing higher Zacks Consensus Estimates ahead of reporting later this month. The full-year earnings forecast of $2.07 per share was increased from $1.99 over the past 90 days.

For 2010, analysts polled by Zacks are calling for earnings of $2.23 per share, versus the 3 months-ago level of $2.11.

Third-quarter projections of 67 cents per share are up a penny over the past 3 months.

Results for the third quarter are scheduled for release on Oct 22.

A Solid Quarter

The second-quarter saw earnings of 43 cents per share, exceeding the Zacks Consensus Estimate by 26.5% and topping the year-prior 29 cents.

“Hershey’s second quarter results reflect continued momentum in the marketplace,” said David J. West, President and Chief Executive Officer. “Investments in our core brands and retail selling capabilities have resulted in strong gains in net sales, profit and U.S. market share. Net sales increased by 5.9 percent driven by the U.S. pricing action announced in August 2008, partially offset by volume declines associated with pricing elasticity and the impact of unfavorable foreign currency exchange rates.”

Strong Fundamentals

The company has an industry-leading net profit margin of 7%. The Growth and Income pick also rewards shareholders with a dividend yield of 3% percent, well above the industry average of 0.7%.

Zacks Investment Research
View original at: Zacks.com News Feed

(HSY) Hershey Co. – Exceeded the Zacks Consensus Estimate by 26.5%

Money can often be made in investment backwaters where few others are fishing for profits. This is in stark contrast, for example, to the technology sector where everyone in the Wall Street community is fishing for the next Moby Dick stock such as Google or Apple Computer.

One quiet backwater of the investment marketplace is the world of soft commodities – coffee, cocoa, sugar, etc. Most investors don’t give a thought to these commodities, except when they are drinking or eating them. One such overlooked soft commodity is sugar.

There has been a good bit of excitement this year in the sugar market as sugar has climbed to a multi-year high, at over 18 cents a pound. Sugar has some real solid fundamentals behind it and it looks set to push toward the highest level seen since 1981.

Here is why sugar is no longer a sleepy backwater of the investment world and ways investors can ’sweeten’ their portfolio with an investment in sugar.

India Has a Sweet Tooth

When one discusses the fundamentals of the sugar market, the key player in the market is India. India is currently the world’s largest consumer of sugar with domestic consumption pegged at 22.5 million tons.

Indian domestic sugar consumption is expected to increase even more in the years ahead due to the rising incomes of Indian consumers. According to sugar broker and researcher Kingsman, sugar consumption will continue to rise as these consumers buy more soft drinks and processed foods.

India also happens to be the world’s second largest producer of sugar. A problem has arisen in the past year with Indian sugar output – production has fallen off a cliff. Indian sugar production is expected to fall by 45% to only 14.7 million tons this year.

This estimate on Indian sugar production was recently lowered again due to an expected poor monsoon season. Another key factor in the sharp decline in the Indian sugar crop is the trend of Indian farmers converting to more lucrative cash crops such as rice and wheat.

This decrease in Indian sugar production has led to a rapid drawdown in the country’s sugar inventory. India’s sugar stocks at the start of the new season on October 1 are estimated at 5 million tons, down sharply from the 10 million tons at the beginning of the current sugar year in October 2008.

This drawdown in India’s sugar stocks has forced India to actually import sugar. India – the world’s second largest producer and once a net exporter of sugar – is now a major importer of sugar. This is a key shift in the global sugar market!

A Sugar High in Brazil

India is being forced to import sugar at a time when supplies are tight globally: production of both cane sugar and beet sugar is expected to decline this year. The International Sugar Organization estimates that the sugar deficit for this year will be 7.8 million tons, up from a prior estimate of 4.3 million tons.

The world’s largest producer and exporter of sugar is Brazil. Brazil’s sugar output for export is expected to rise only 170,000 or about 5% during 2008-09 as local producers continue to favor ethanol production. This will keep the sugar market very tight.

The global financial crisis has had a marked impact on the global sugar industry. The crisis has had little effect on the demand side but has done great damage to the supply side. The Brazilian sugar industry has been hit particularly hard because of widespread use of cheap debt to leverage expansion.

Brazilian sugar mills no longer have easy access to credit to export their crop, hedge their crop, and expand their business.  The sugar merchant, Czarnikow, said that funding issues for Brazil’s sugar industry were “critical”. Funding issues are especially critical for Brazil’s smaller sugar mills, which unlike Brazilian sugar giant Cosan (CZZ), have little access to the capital markets.

Sweet Investment Choices

For investors looking to take advantage of the supply/demand imbalance in the sugar market, here are three investment choices that give investors exposure to the sugar market:

iPath Dow Jones – UBS Sugar Subindex Total Return ETN (SGG) – This is an exchange-traded note whose return is based on sugar futures contracts.

Ipath Dow Jones – UBS Softs Subindex Total Return ETN (JJS) – This is an exchange-traded note whose return is based on futures in  sugar, coffee, and cotton. The approximate weightings of the commodities are as follows: sugar – 44%, coffee (which has also done very well in 2009) – 31%, and cotton – 25%.

A reminder – ETNs are senior, unsubordinated, unsecured debt securities of the issuer, so there is some additional risk involved as compared to an exchange-traded fund (ETF), which actually holds securities.

Cosan (CZZ) – This Brazilian company has been growing rapidly through acquisitions, as it acquires smaller, struggling sugar producers. The company is now the 2nd largest ethanol producer globally and the largest exporter of ethanol in the world.

More importantly, Cosan is one of the world’s largest producers of sugar cane and is the world’s largest processor of sugar cane. The rising price for sugar globally is expected to help Cosan post a solid profit for 2010.

With the production of sugar expected to remain in decline for the foreseeable future and the demand for sugar being relatively resilient to an economic slowdown, an investment in sugar should sweeten up anyone’s portfolio.

Good investing,

Tony Daltorio

View original at: Investment Advice and Investment Research with a Contrarian Point of View

(CZZ) Three Ways to “Sweeten” Your Portfolio