99 Cents Only Stores Stock is No Bargain

99 Cents Only Stores (NYSE: NDN) stock popped 9.4% on Friday. Is it still a bargain?

99 Cents claims that it sells merchandise at or below 99.99 cents per item. By April, it operated 285 retail stores -- 211 in California, 35 in Texas, 27 in Arizona, and 12 in Nevada. On Friday, news emerged that Apollo Management planned to bid $22 to $24 a share for 99 Cents.

Has news of this bid taken all the upside opportunity out of investing in 99 Cents? Here are two reasons to consider an investment:

• Higher sales and profits and decent balance sheet. 99 Cents sales have grown at a 6.2% annual rate over the last five years from $1.1 billion (2007) to $1.4 billion (2011) and its net income has increased at a 64.9% annual rate from $10 million (2007) to $74 million (2011) -- yielding a solid 7% net margin. It has under $1 mllion in debt and its cash has grown at a 14.4% annual rate from $118 million (2007) to $202 million (2011).
• 99 Cents is earning more than its cost of capital – and it’s improving. How so? It’s producing positive EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In 2011, 99 Cents EVA momentum was 1%, based on 2010 revenue of $5.5 billion, and EVA that improved from 2010's $17 million to 2011's $25 million, using a 7% weighted average cost of capital.

Here are two reason to avoid it:

• High valuation. 99 Cents trades at a Price-Earnings-to-Growth ratio of 1.65 (1.0 is considered fair value) — a P/E of 19.3 on earnings forecast to grow 11.7% to $1.26 in fiscal 2012 -- and is expected to grow 9.3% in fiscal 2012.
• Mediocre earnings reports. 99 Cents has been able to beat analyst’s expectations in only two of its past five earnings reports and has missed expectations by over 7% in the last two reports.

If Apollo buys 99 Cents, the stock will rise another 5% to 10% from its current level. If not, it should plunge and stay in stock purgatory until it can accelerate its earnings growth.