A: DENTSPLY is the global leader in dental products, with product lines that include a variety of consumables and lab equipment. Earnings have held up well throughout the recession; first-quarter sales were off by just 6 percent, largely because of currency fluctuations and patients putting off elective procedures.

We like DENTSPLY’s long-term prospects and expect earnings to return to normal later this year and earnings growth to accelerate throughout 2010. The government estimates that industry growth will average about 3 percent next year and normalize at around 6 percent by 2012. Americans aren’t getting any younger, and the number of individuals carrying dental insurance continues to grow–those who are insured are more likely to seek routine dental care.

The company has also benefited from the fact that about half of its revenues are generated outside the US. That presents a substantial opportunity as household incomes and standards of living improve in international markets. And although nothing definite has been announced, DENTSPLY could take advantage of attractive valuations to make an acquisition.

Q: I recently purchased shares of Linn Energy (NSDQ: LINE), but I’m thinking of selling them because I just found out that I’ll receive a K-1 instead of a 1099-DIV at tax time. Do K-1’s complicate filing income taxes?–R. Cromer, San Mateo, CA

A: Structured as pass-through entities, master limited partnerships don’t pay federal income taxes at the corporate level. For tax purposes, it’s as though unitholders generated the partnership’s earnings for themselves. Because of that structure, investors receive a K-1 around tax time instead of the more familiar 1099. Though different, K-1 forms aren’t that much more complicated.

Investors who handle their own taxes using popular software programs like TurboTax will find that they can simply download the forms into the program and it handles the details. Also, any
CPA and most tax preparers should be familiar with how to handle the paperwork.

Q: What’s your take on Family Dollar (NYSE: FDO)? I purchased the stock in early March and it appears to have stalled.–Mark Scholfield, Denver, CO

A: One of the top performers last year, Family Dollar reaped the benefits as increasingly value-conscious consumers flocked to the store amid rising unemployment and reduced credit availability. And that trend continued into this year. Sales for the second quarter ended February 20 increased 8.7 percent and same-store sales were up 6.4 percent, generating net income of $84.1 million-32 percent higher than a year ago. Although increasing store traffic and management’s decision to expand the company’s offerings of consumables to include more frozen and packaged foods were the driving force behind these gains, inventory controls also helped to improve margins slightly.

As of writing, Family Dollar hadn’t reported its results for the third quarter ended May 20, though the company did report that sales increased 8.2 percent during that period, driven by an impressive 6.2 percent increase in same-store sales. As these numbers were in line with management’s forecast, it’s reasonable to expect that the retailer will achieve its projected earnings per share of $1.90 to $2.00 for the year.

The market rally and improving sentiment among investors contributed to the stock’s tepid performance in the second quarter, as signs of green shoots and a sense that many good companies were undervalued after the massive selloff prompted many to allocate money away from safer names. At the same time, some analysts have expressed concerns that Family Dollar and other discount retailers won’t be able to maintain their earnings momentum once the recovery takes hold. That may be true–if you believe a meaningful recovery will come sooner rather than later.

But given the mounting unemployment and the deleveraging process faced by many US households, Family Dollar could enjoy increased customer traffic for some time. We would continue to hold it along with riskier names as a hedge. The dividend the stock pays is icing on the cake.

Q: Does the Obama administration’s plan to heighten regulation of the financial sector change your take on Hudson City Bancorp (NSDQ: HCBK) or IBERIABANK (NSDQ: IBKC)?–anonymous, via email

It’s difficult to foresee what form the Obama administration’s recommendations will ultimately take; from our perspective, the continued weakness of the US economy remains the biggest threat to the nation’s financial institutions–with unemployment on the rise, loan performance will continue to deteriorate, even among prime borrowers. The specter of heightened regulatory scrutiny, especially in the area of consumer protections, could eat into earnings.

But the investment theses for Hudson City and IBERIABANK remain intact: Both have continued to benefit from the struggles of the larger banks in their markets, and relatively stringent underwriting standards have kept losses to a minimum. Although these firms aren’t likely to replicate outsized earnings generated by banks at the height of the boom, both will emerge from the crisis in strong shape and will likely control a bigger piece of the pie.