ServiceNow Stock And 2 Quality Picks Built For Higher Interest Rates

With Fed Chair Kevin Warsh flagging the risk of more rate hikes as inflation holds at 3.7%, the gap between fragile balance sheets and solid cash generators becomes more important than ever. Higher borrowing costs and rising Treasury yields are already testing valuations. This article walks through three large cap quality stocks exposed to this rate shock, and explains why some investors see potential opportunity while others may prefer to stay on the sidelines.

The three stocks covered below are only a sample of this theme, and the full screen surfaced 24 more U.S. large cap quality companies with similar higher rate resilience stories that are not detailed in this article. To go straight to the full list, identify your own filters, and analyze which ideas feel strongest for your portfolio, head directly into the U.S. Large-Cap Quality Stocks Resilient to Higher Interest Rates screener.

ServiceNow (NOW)

ServiceNow is a US$143.1b workflow software company that helps large organisations run critical digital processes, which fits the screener’s focus on established, profitable large caps with strong cash generation and controlled leverage. Almost all of its roughly US$14.7b revenue comes from internet software and services, mainly subscription workflows that automate IT, HR, customer service, security and risk across global enterprises. This software centric model is capital light and built around long term contracts with large customers.

ServiceNow interests many investors because it looks more like digital infrastructure than a typical software vendor. High margin subscription revenue, strong cash generation and customer retention that management describes as 99% give it characteristics some see as helpful when borrowing costs rise and budgets tighten. At the same time, the stock trades on a rich valuation, management tenure is relatively short and the company relies on external funding, so higher rates can still pressure sentiment and financing costs. The real question is whether ServiceNow’s push into AI powered workflow and security, now generating more than US$1b in annual contract value, is enough to justify treating the company as a long term compounder rather than just another expensive software stock.

ServiceNow’s push into AI powered workflows is reshaping how investors frame its rich valuation. See how its cash generation, contracts, and balance sheet stack up in the ServiceNow financial health report

MSC Industrial Direct (MSM)

MSC Industrial Direct is a roughly US$6.8b distributor of metalworking and maintenance, repair and operations products. It fits the screener’s focus on established, cash generative large caps that some investors see as better placed when financing conditions tighten. Its business is concentrated in distributing metalworking and MRO products and services, which together produced about US$3.9b in revenue, with most activity in the United States and a smaller contribution from Canada, Mexico and other markets.

MSC Industrial Direct provides exposure to the everyday nuts and bolts of manufacturing, from cutting tools and abrasives to vending machines and in plant programs that aim to lock in recurring orders. The company combines this with a long dividend record and recent earnings momentum, plus cost saving projects that target better margins over the next few years. The catch is that growth has not always kept pace with expectations and the stock already trades at a premium, so a lot rests on management turning its tech and productivity investments into sustained cash flow. If this happens, investors who look past the near term rate noise may see more here than a simple industrial distributor story.

MSC Industrial Direct’s margin story is quietly evolving while the stock already carries a premium. Get the full context on cash generation, dividends, and what the recent earnings trend may really signal in the analysis report for MSC Industrial Direct

Curtiss-Wright (CW)

Curtiss-Wright is a US$22.4b aerospace, defense, and industrial engineering company that fits the screener by combining established long-cycle programs with a conservative balance sheet and a focus on steady cash generation. It sells a wide range of engineered components and systems into aircraft, defense electronics, industrial vehicles, and nuclear power markets, with revenue split across Aerospace & Industrial at about US$1.0b, Defense Electronics at about US$1.0b, and Naval & Power at about US$1.6b. With this scale and mix, Curtiss-Wright offers investors exposure to mission critical defense and nuclear infrastructure that some see as better able to handle higher borrowing costs while still rewarding shareholders.

Curtiss-Wright is drawing attention because it couples long term defense and nuclear programs with rising buybacks and what management describes as strong free cash flow conversion, which can be attractive when rates stay elevated and capital is more expensive. Recent updates highlight higher guidance, a growing defense electronics backlog, and an expanded repurchase program, yet the stock still carries a premium P/E and relies on large contracts that could see timing swings or budget pressure. For investors who want quality exposure to defense, nuclear and industrial hardware and are willing to weigh valuation and contract risk against that earnings and cash flow profile, Curtiss-Wright is a story worth watching more closely.

Curtiss-Wright’s mix of long term defense and nuclear programs with a premium P/E raises the question of what investors might be missing about its future cash generation. Get the context behind that earnings profile in the analyst forecasts for Curtiss-Wright

Seeking Alternatives Before Momentum Flies

Fresh ideas can move fast. By the time the crowd spots the next breakout, the most attractive entry points may no longer be available. Consider scanning these under the radar stocks while it may still matter.

• Explore resilient income streams by scanning a curated set of high payout opportunities in the 12 dividend fortresses.
• Review early momentum in smaller AI leaders by sorting through carefully filtered companies featured in the 74 profitable AI stocks that aren't just burning cash.
• Evaluate potential upside in critical materials by reviewing the focused group of producers within the 9 top copper producer stocks.

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.

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