Spinoff Odds & Ends: ERA & Brazil, Amazon & AWS

A few small hits for a tough New York Thursday (at least for us Mets fans):

  1. Era Group (ERA), the helicopter focused spinoff from Seacor (CKH), got hit hard this week on news that Petrobras (PBR) was dropping its helicopter transport services. With falling oil prices and the company under intense scrutiny amidst a seemingly ever growing corruption scandal, it may be some time before this activity recovers. Era had a JV in Brazil serving the oil giant and the recent news (and loss of revenues) sent shares tumbling. Era is just the latest company to get smacked down due to problems in Brazil. Another recent example was DuPont (DD), where CEO Ellen Kullman stepped down shortly after lowering guidance due to weaker expected results from the South American country. Once the darling of the emerging markets, Brazil has been besotted by corruption, a weakening currency and numerous other economic challenges. The Economist published a nice report highlighting some of the country’s woes several years ago and many of the structural issues remain in place today or have only worsened as time has passed. A worthy lesson here – many investors choose to ignore the emerging markets, but their portfolios may have direct exposure through seemingly local companies.
  2. Amazon (AMZN) reported surprisingly strong earnings last week and naturally, questions about spinning off its Amazon Web Services business emerged. Every earnings report, good or bad, brings out the same question: Why is an e-commerce player the leader in cloud services? Despite the greater transparency into the business, it doesn’t seem like this is something that is going to happen soon though and investors seem to like Amazon’s ownership of this asset. In the latest Graham & Doddsville newsletter, White Rock Capital’s Alex Sacerdote touted Amazon mainly for what he perceives as a misunderstanding of the potential in its AWS business. There is over an entire page dedicated to this discussion, but in conclusion he states that:

We think half of all compute will be in the public cloud versus 3% today. Bezos draws the analogy to the old days when corporations had their own power plants before we eventually developed centralized utilities. We think AWS could wind up as the equivalent of a centralized utility with 50% to 70% market share around the entire world. We are convinced this is going to be an extremely valuable business. The stock is getting credit for it now but we still think people are missing how big the opportunity is and how thoroughly Amazon will dominate it. It’s a large position for us now and it continues to amaze me how one company has been able to position itself so well for two of the largest business opportunities of our generation in e-commerce and the public cloud.

Amazon famously gets a lot of slack from its shareholders and CEO Jeff Bezos has consistently delivered for them. Even when the inevitable struggles come about, visionary founding CEO’s tend to get a lot of rope. The company believes there will be more synergies between its businesses and I am sure it also believes AWS will become a big profit driver down the road. Management has done a great job building up this business into a dominant market leader and unless the company severely stumbles (possibly giving an opening for an activist) or dramatically alters its strategy internally, it’s hard to see this business getting set free.

Disclosure: Author holds no position in any stock mentioned.

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