TE Connectivity: A Compounding Machine with ROCE-Driven Growth Ahead?

TE Connectivity (NYSE: TEL), a leader in electronic components and sensors, is emerging as a compelling growth candidate thanks to its improving return on capital employed (ROCE) and a bullish analyst consensus. With ROCE—a key metric for assessing capital efficiency—showing sustained strength, the company's operational discipline and strategic moves are aligning to create a risk-reward profile that could reward long-term investors.

ROCE: The Foundation of Sustainable Growth

TE Connectivity's ROCE, a measure of profitability relative to capital deployed, has been a steady 16% over the past five years, outpacing the Electronic industry average of 11%. However, a recent uptick to 17.27% in Q1 2025 signals improving capital efficiency, driven by margin expansions and strategic investments. This metric is critical because it reflects how well management allocates capital to generate returns, a hallmark of compounding growth.

The stability of ROCE despite flat capital employed growth suggests TEL is optimizing existing assets rather than overextending. This contrasts with growth-focused peers that often dilute returns through aggressive reinvestment. For investors, this means profits are compounding organically without excessive risk.

Operational Efficiency and Strategic Momentum

TE Connectivity's Q2 2025 results underscore operational excellence:
- Adjusted operating margins rose to 19.4%, up from 18.5% a year ago, driven by cost discipline and higher-margin Industrial Solutions sales (up 17% YoY).
- The $4.8 billion Richards Manufacturing acquisition in April 2025 expands exposure to high-growth utility markets, leveraging TEL's localization strategy to reduce supply chain risks.
- Free cash flow hit $1.1 billion year-to-date, fueling shareholder returns (a 9% dividend hike and $1 billion in buybacks).

These moves highlight management's focus on converting operational leverage into sustained ROCE growth. The Industrial segment's surge in AI, aerospace, and energy markets—areas with strong secular trends—positions TEL to capitalize on long-term demand.

Analyst Consensus: Bullish on Valuation and Catalysts

Analysts are increasingly bullish, with 22 of 26 firms rating TEL a “Buy” or equivalent, according to Bloomberg. Key catalysts include:
- Richards' accretive impact: Expected to boost FY2025 EPS by ~$0.10.
- Margin expansion runway: The Transportation segment's 20.7% adjusted margins and Industrial's 17.9% margins suggest further upside.
- Valuation upside: At a 17.5x forward P/E versus the industry average of 22.5x, TEL trades at a discount despite superior ROCE.

Risks, but Manageable Ones

• Tax headwinds: A one-time $742 million non-cash tax charge in Q2 2025 depressed GAAP EPS but was excluded from adjusted metrics. Management is mitigating future risks via tax planning.
• Sector slowdowns: Weakness in automotive and commercial transportation (a drag on Transportation Solutions sales) could pressure margins temporarily. However, TEL's shift toward higher-growth markets like AI and energy mitigates this exposure.

Investment Thesis: Buy the Dip, Hold for Compounding

TE Connectivity's improving ROCE, robust free cash flow, and strategic acquisitions align it with a compounding growth model. With a consensus price target of $135 (vs. current $115) and a 5-year track record of 78% total returns (despite flat ROCE until now), TEL appears primed to outperform.

For investors, the risk-reward balance is compelling:
- Upside: Analysts see 18% upside to targets, driven by Richards' synergies and margin expansion.
- Downside: Valuation headroom and a 2.3% dividend yield provide a buffer.

Final Take

TE Connectivity is a rare blend of steady profitability and strategic agility. While not a high-growth disruptor, its ROCE-driven model and analyst optimism suggest it's a core holding for long-term growth portfolios. With execution on the Richards deal and margin targets, TEL could deliver multiyear compounding—making now a good entry point ahead of its industrial tech tailwinds.

Action to Take: Consider a position in TEL on dips below $110, with a 12-month target of $130+. Monitor Q3 results for Richards' integration progress and margin trends.