In addition to being one of August’s Most Attrac­tive Stocks, Medtronic was highlighted by my colleague Tom Brakke at Research Puzzle Pix.

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 MDT, the company’s ROIC is in the Top Quin­tile of all the com­pa­nies we cover and its economic earnings are growing. At the same time, the stock’s valuation implies that MDT’s profits will decline by 50% and never grow again. In other words, the stock market is predicting a permanent decline of 50% in MDT’s profits. I’d say those are some low expectations.

HIDDEN GEM: Our discounted cash flow analysis shows that MDT’s current valuation (stock price of $31.95) implies that the company’s profits will decline by 50% and never grow again. Our economic earnings models shows profits are growing, not declining, which makes the Risk/Reward for MDT Very Attractive.

For details on what causes the dif­fer­ence between Eco­nomic Ver­sus Account­ing Prof­its, see Appen­dix 3 on page 10 of our report on MDT. See Appen­dix 4 to learn how MDT increased NOPAT by cut­ting costs and increased its NOPAT Mar­gin from 24.5% to 25.6%. See Appen­dix 5 for details on how MDT grew Invested Cap­i­tal slower than revenue and drove Invested Cap­i­tal Turns higher. Appen­dix 7 (in the Return on Invested Cap­i­tal sec­tion) shows how the improved NOPAT Mar­gin and rising Invested Cap­i­tal Turns result in an increase in ROIC (to 14.5% from 13.4%) and Eco­nomic Profit, which rose by $345mm.

As per Invest­ment Strat­egy 101 and How to make money pick­ing stocks, MDT 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.