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,
