IBM is one of August’s Most Attrac­tive Stocks. And like all of our Most Attrac­tive Stocks the com­pany has (1) high and ris­ing eco­nomic prof­its (as dis­tinct from account­ing prof­its**) and (2) a cheap val­u­a­tion. As shown in our report on IBM, the company’s ROIC is in the 2nd Quin­tile of all the com­pa­nies we cover. At the same time, the stock boasts a 10% FCF Yield and our dynamic dis­counted cash flow analy­sis shows the cur­rent stock val­u­a­tion implies that the mar­ket believes IBM’s prof­its will decline by 10% and never grow after that decline. In other words, the stock is priced for per­ma­nent profit con­trac­tion — no growth ever.

HIDDEN GEM: Our detailed val­u­a­tion model shows that IBM grew its “eco­nomic” prof­its more than it account­ing prof­its dur­ing its last fis­cal year. Eco­nomic prof­its rose by $1.15bn while account­ing prof­its rose by $1.09bn. For details on what causes the dif­fer­ence between Eco­nomic Ver­sus Account­ing Prof­its, see Appen­dix 3 on page 10 of our free report on IBM.

See Appen­dix 4 to learn how IBM increased NOPAT by cut­ting costs and increased its NOPAT Mar­gin. See Appen­dix 5 for details on how IBM cut its Invested Cap­i­tal to off­set the drop in rev­enue and keep its Invested Cap­i­tal Turns close to 1.0. Appen­dix 7 (in the Return on Invested Cap­i­tal sec­tion) shows how the improved NOPAT Mar­gin and steady Invested Cap­i­tal Turns result in an increase in ROIC (to 14.1% from 12.1%) and Eco­nomic Profit, which rose by $1.15bn while Net Income rose by only $1.09bn.

As per Invest­ment Strat­egy 101 and How to make money pick­ing stocks, IBM fits the pro­file of a great stock to buy.

**See Finance 101 and Eco­nomic Ver­sus Account­ing Prof­its for more detail on why account­ing prof­its are not reli­able indi­ca­tors of cor­po­rate prof­itabil­ity or value creation.

Note: Stock pick of the week is updated every Tuesday.