Gene MarcialOne of the most ignored stocks in retailing is the deep-discount chain with an unusually direct name: 99 Cents Only Stores (NDN). Although it trades on the New York Stock Exchange, some investors view 99 Cents as a second-rate cousin to the major discounters, such as Wal-Mart (WMT).

Yet business fundamentals at 99 Cents, which operates nearly 300 stores mostly in California, Texas and Nevada, are truly impressive. Results from its most recent quarter beat Wall Street's forecasts, with earnings doubling from a year ago. And for the full fiscal year ended Mar 31, 2010, profits were even more compelling. They more than tripled, to 87 cents a share. So 99 Cents Only Stores, indeed, deserves some attention.

The company's strong earnings growth, margin expansion and improving revenues are the result of a turnaround effort. But Wall Street is hardly noticing.

Attractive as the second-quarter results were, they haven't helped shore up 99 Cents' flaccid stock. It has tumbled to $14 a share, down from a 52-week high in January of $18.10. Along with the low-price products it sells, the best bargain at 99 Cents may be its stock.

The Bears Could Be Wrong

It sells a wide variety of consumable products, including groceries, food and vegetables, all priced at 99 cents each, or less. Although dollar-store industry trends remain healthy, the bears seem to be dominating the stock. They contend that shares of 99 Cents will lag those of its big competitors.

But they could be wrong. "The stock deserves a much higher price," asserts Patrick McKeever, senior analyst at MKM Partners, who covers discount and off-price retailers. Trading at just 15 times his fiscal 2011 earnings estimate of $1.02 a share, the stock is undervalued and very attractive, he says. He forecasts earnings of $1.20 in fiscal 2012.

The company's balance sheet is solid, loaded with a cash stash of nearly $3 per share -- with no debt. It also owns a valuable portfolio of real estate assets, notes McKeever, who rates the stock a buy. Having recently demonstrated strong earnings growth after two years of dismal profits, 99 Cents has the potential of continuing margin expansion. McKeever figures the stock is worth $20 to $22 a share, or about 2.5 times its book value.

Ample Cash Flow


After a couple of lackluster years, sales climbed 4% in fiscal 2010, to $1.36 billion, and some analysts expect the advance to continue. James D. Ragan, analyst at investment firm Crowell Weedon forecasts revenues rising to $1.43 billion in fiscal 2011 and jumping to $1.52 billion in fiscal 2012.

99 Cents deserves some credit for pulling off a turnaround in a tough year. But investors have "underappreciated the strong margin and cash flow recovery that's underway," says Ragan. As part of its rebound, the company has been able to accelerate the opening of new stores. In March, 99 Cents opened three stores, and it plans to add at least 15 more this year and next.

Cash flow of $100 million, in addition to cash assets of $170 million, should be ample to help cover a higher capital budget -- and a stock-repurchase program, figures David R. Cohen, analyst at investment research firm Value Line. The stock is what Value Line calls a "timely buy" and offers good appreciation potential over the long haul, going into fiscal 2013-2015, says Cohen.

It would be logical to expect that discounters like 99 Cents, which tend to be resilient and perform better during hard times, will continue to do well as the economy recovers, with help from the company's own recovery. And while the stock is still languishing, 99 Cents Only Stores may prove to the bargain many investors are looking for.

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