With the Federal Reserve expected to lift interest rates as inflation and job growth stay firm, pricing power, balance sheet strength, and sensible valuations are back in focus. Higher borrowing costs can pressure many companies, yet they may also improve earnings for others that are better positioned for this backdrop. This article looks at three stocks from a High-Quality Value Stocks screener that appear well aligned with this rate driven setup, each with moderate debt, solid health scores, and reasonable valuations. Read on to see which three companies could merit a closer look under these conditions.

Ternium (TX)

Overview: Ternium is a vertically integrated steel producer that makes a wide range of flat and long steel products and also mines and processes iron ore, supplying customers across Mexico, Brazil, the Southern Region and other international markets.

Operations: Ternium generates about US$15.1b in revenue from its Steel segment and US$1.1b from its Mining segment, with inter segment eliminations of US$585.5m, and key sales regions including Mexico, Brazil, the Southern Region and other markets.

Market Cap: US$8.5b

Ternium is sometimes noted by investors who are looking for high quality value in a rising rate environment, as it combines a vertically integrated steel and mining model with moderate debt, consistent free cash flow generation and a history of balance sheet strengthening. The stock has been flagged in some analyses as trading well below certain estimates of fair value and as potentially benefiting from government measures that support local pricing and margins in Mexico, along with capacity expansions aimed at higher value steel products. At the same time, investors need to monitor sector wide challenges such as global overcapacity, heavy capital spending plans and exposure to Latin American currencies and politics, which could all pressure margins if conditions become less favourable.

Ternium’s vertically integrated steel and mining model, moderate debt and free cash flow often point to valuation tension, and the full picture only really comes into focus once you see the 5 key rewards and 1 important warning sign

Arch Resources (ARCH)

Overview: Arch Resources is a U.S. coal producer that supplies metallurgical coal for steelmaking and thermal coal for power generation, operating mines across key coal regions and selling to utility, industrial, and steel customers domestically and overseas.

Operations: Arch Resources generates about US$1.6b in revenue from its Metallurgical segment and around US$1.1b from its Thermal segment, including the Powder River Basin.

Market Cap: US$2.4b

Arch Resources attracts attention in a higher rate setting because it combines a focus on profitable coal production with low leverage, strong cash generation and valuation multiples that many investors view as discounted versus peers. Forecast earnings growth of around 41% a year and consistent profitability over the past five years sit alongside recent margin pressure, weaker returns on equity and an unstable dividend record. As a result, cash returns may not be as smooth as some income investors prefer. With earnings expected to grow faster than the broader U.S. market while revenue is projected to edge lower, the key question is how sustainable that earnings profile really is under changing coal demand and funding conditions.

Arch Resources’ earnings profile and low leverage often appear out of sync with how the stock is priced. The real story only becomes clear once you see the 4 key rewards and 2 important warning signs

AUB Group (ASX:AUB)

Overview: AUB Group is an insurance broking and underwriting agency company that connects mostly small and mid sized businesses with insurers, using a mix of local broker networks, digital SME platforms and managing general agents across Australia, New Zealand and several international markets.

Operations: AUB Group generates about A$420m from Australian Broking, A$94m from New Zealand Broking, A$233m from Agencies, A$459m from International operations and A$27m from Support Services, with a segment adjustment of A$14m.

Market Cap: A$3.7b

AUB Group may appeal to investors looking for financial businesses that can benefit from rising interest rates, with consistent profitability, strong cash flows and a model that leans on recurring insurance premiums rather than credit risk. The stock screens as high quality value, trading below some estimates of intrinsic value, while analysts have identified potential for further earnings growth supported by digital SME platforms such as BizCover and ongoing bolt on acquisitions. On the other hand, the company carries meaningful debt, has one off items that complicate recent results and depends on successful integration of overseas deals. For those wanting to understand how these moving parts could affect returns as the rate cycle shifts, the full story for AUB Group goes much further than the headline numbers.

Accelerating acquisitions, digital SME platforms and recurring premiums make AUB Group look like a business model investors may be underestimating, but the real twist only shows up once you review the analyst forecasts for AUB Group

The three stocks covered here are just a starting point, and the full High-Quality Value Stocks screener identified 39 more companies with similarly compelling stories that could fit a rate driven setup, which you can review in the High-Quality Value Stocks screener. Using Simply Wall St, you can quickly identify, analyze, and filter for the exact catalysts, balance sheet traits, and valuation drivers that matter most to you, allowing you to focus on the highest conviction ideas.

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If AUB Group or any of these companies sound like a great opportunity, register for FREE with Simply Wall St and add your companies to a Watchlist to monitor the share price against the fair value the ideal entry point. Once you've made your move, manage your holdings with our Portfolio Command Center that filters out the noise to deliver only the most critical, actionable updates. Throughout your journey, our Community allows you to filter the best ideas from thousands of investor perspectives. By uncovering hidden catalysts and risks early, you'll accelerate your decision-making and stay one step ahead of the market.

Seeking Fresh Alternatives Beyond These Picks?

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.