Thermon Group: ROCE Growth and Strategic Fortitude in a Volatile Market

Thermon Group Holdings (NYSE: THR) has emerged as a compelling investment opportunity in a challenging macroeconomic environment, thanks to its disciplined capital allocation strategy, improving return on capital employed (ROCE), and a robust backlog fueled by strategic acquisitions. While peers struggle with cyclical demand volatility, Thermon's focus on recurring revenue streams, decarbonization trends, and operational efficiency has positioned it to outperform. Let's dissect the key drivers behind its resilience and why now could be an opportune time to consider this stock.

ROCE: A Silent Catalyst for Value Creation

ROCE, a measure of how effectively a company uses capital to generate profits, is critical for assessing Thermon's operational health. While explicit ROCE figures aren't provided in recent reports, we can infer trends using key metrics:

• Adjusted EBITDA margins expanded to 21.9% in fiscal 2025 (up from 21.1% in 2024), signaling better capital efficiency.
• Free cash flow surged to $35.1 million in Q4 2024, up 60% year-over-year, reflecting cash conversion improvements.
• Net leverage dropped to 0.9x as of March 2025 (from 1.2x in 2023), reducing interest burden and freeing capital for growth.

These metrics suggest that Thermon's ROCE is improving, even if not explicitly stated. The company's focus on high-margin OPEX (operations and maintenance) revenue, now 85% of total sales, reduces reliance on volatile large projects and amplifies capital returns.

Capital Allocation: Prudent and Strategic

Thermon's success hinges on its ability to deploy capital wisely. Recent moves underscore a focus on high-ROIC opportunities and shareholder returns:

1. Acquisitions Drive Diversification:
2. The Vapor Power acquisition (Dec 2023) added $13.9 million in Q1 2025 revenue and bolstered its position in electric/gas boiler solutions.

3. The F.A.T.I. acquisition (Oct 2024) expanded its service portfolio in industrial maintenance, contributing to backlog growth. Both deals align with management's goal to achieve 70% non-oil/gas revenue by 2026, reducing cyclicality.

4. Share Buybacks and Debt Reduction:

5. Thermon returned $20 million to shareholders in 2025 via buybacks, with an additional $30 million authorization pending.
6. Total debt fell to $138.9 million (down 19.5% YoY), enabling a net leverage ratio of 0.9x, well below peers.

Backlog: A Buffer Against Macroeconomic Headwinds

Thermon's $240.3 million backlog (up 29% YoY) is a key defensive asset. Even as large project revenue dipped 36% in 2025, recurring OPEX revenue grew 21%, insulating cash flows. The backlog's composition—85% OPEX-driven—ensures steady revenue visibility, while december's strong bookings ($138.8M, +19% YoY) suggest momentum is intact.

Strategic Positioning in Decarbonization

Thermon is a quiet beneficiary of the energy transition. Its Genesis Network, a digital heat-tracing control system, and electrification solutions are in high demand as industries shift toward sustainable practices. Management's focus on $200 million+ decarbonization projects in 2025 highlights the tailwind here.

Valuation: A Compelling Entry Point

At current prices, Thermon trades at a 12.5x forward P/E, below its 5-year average of 15.2x, despite improving margins and backlog. With $39.5 million in cash and a $50 million buyback authorization, the company is well-positioned to capitalize on dips.

Risks to Consider

• Macroeconomic Downturns: Delayed large projects could pressure margins if OPEX growth slows.
• Trade Tariffs: Input cost pressures in H1 2026 could compress margins temporarily.

Investment Thesis: Buy on Dips, Hold for the Transition

Thermon's asset-light model, diversified backlog, and management's track record (exiting Russia, executing acquisitions) make it a standout in an uncertain market. While near-term volatility is likely, its recurring revenue streams and decisive capital allocation create a compounding asset profile.

Actionable Advice:
- Buy on dips below $28/share (current price ~$30), with a 12–18 month horizon.
- Hold for long-term exposure to decarbonization and industrial electrification trends.

In a world of macroeconomic uncertainty, Thermon Group's focus on operational excellence, capital efficiency, and secular growth drivers makes it a rare gem in the industrial sector.