Hohn and HALO, Untapped Pricing Power and Moat

This has been a year where I have been really drawn towards the ideas of Chris Hohn on pricing power and HALO (Hard Assets Low Obsolescence). I am drilling it in my head that the untapped pricing power Warren always raves about comes down to what happens in an inflationary environment. 

Two companies have $100 in revenue with a 20% profit margin. Inflation ramps up to 10%. Company A can't raise its price and will have its margin drop to $12 as expenses increased to $88 ($80*1.1). Company B is able to raise its price with inflation protecting its margin. It now charges $110 while expenses are $88. It now has $22 in profit that is still 20% profit margin.  

In a third scenario with a company with $10 in margin, if it can increase prices 1% more than inflation, its absolute profit goes up 10%. "If you can price just 1% above inflation and you have a 20% profit margin, your profits will grow 5% faster than your revenue." - Chris Hohn 

The GE investment forms the basis of my investigation towards his ideas. The recurring revenue of the growing installed base led to the allocation of nearly 34% of his portfolio to it. It was protected by its nearly insurmountable lead in making engines through its process that would take a lot of resources to crack. 

Some other ideas that demonstrate the ideas of HALO are increasing volume without increasing the necessary capital to expand the revenue, rising gross margins, being a small portion of the customer's expenses, switching costs, no true substitute, genuine, durable preference, high market concentration, and product scales with customers' success. Essentially, a royalty on the capex of others. 

The following industries with the following busnesses seem to exemplify Hohn's ideas:  

Aerospace: GE, TDG, HEI, 

Industrial Gases: LIN, AI.PA, APD 

Railroads: UNP, CNI, CPKC, CSX, NSC 

Rating Agencies: FICO, MCO, SPGI 

Exchanges: CME, ICE 

Aggregate/Construction Material: MLM, VMC 

Cell Towers: AMT, CMI, SBAC, CLNX 

Midstream: ENB, TRP, KMI, WMB, ET, EPD, PAA, WES, MPLX,

Rubbing Mistakes on Face

2025 Mistakes TEVA: Could not find a buy at $18 despite Druckenmiller presenting the clear thesis of a new business model of innovative drugs (Avojoy, Austedo, and Uzedy) supplementing the strong and stable generic/APIs. That business thrived on scale and it has been deleveraging last few years. WBD: Content was king and at single digits or $10/20billion market cap, it was bound to get a buyout offer despite fcf deteriorating to 4b from 6b. Debt load of >30b slowed me down enough HII: It was never going away with it building so much of USN ships and should have loaded up on drop earlier in the year DK: SRE was not on my radar, but the assets were too cheap even if we are at a low point of the cycle GTX: Hard to buy something at $10 when it was $6 when I first looked at it, but fcf and deleveraging was enough. Maybe some things stay here for longer and cashflows are extended with ICE not going away as quickly. Missed Gas/Electricity boom with AI: gev, vst, ceg; If I was smarter, but nuclear power plants' replacement cost and base load should have been an undervalued asset. EZPW: In July of 2021, it was at $6. It was a microcap at 300-400mm and fcf of 30mm. It is now $26 with market cap of 1.6b and 110mm of fcf. The icky business factor clouded the great business model of lending at a high rate. Counter-cyclical to a point and should have been a buy with diversification. One winner makes up for the rest of the losing portfolio.