Leading dental-equipment supplier Dentsply (XRAY) is finding ways to keep growing in this volatile environment.

The company posted mixed third-quarter results Tuesday evening. Dentsply earned 46 cents a share, which was 2 cents ahead of the consensus analyst estimate. Revenue grew 8.6% from the previous year to $530 million, but fell $7.2 million short of expectations.

At Wednesday's closing price of $30.23, the stock is down nearly 33% year to date and is valued at 15.9 times expected full-year earnings of $1.90. While this represents a premium to the broader market, Dentsply is trading at a small discount to its peers and 20% lower than its historical average valuation.

With that in mind, I'm here to answer readers' questions: Should you buy it? Can Dentsply continue to grow in a declining economy, or is the stock too expensive for the current environment?

Despite the broad decline in global growth expectations this year and heading into 2009, Dentsply remains on track to grow earnings by 15% in 2008 and another 11% next year. That would mark the 10th straight year of positive earnings growth for Dentsply, and the seventh and eighth times the company delivered double-digit growth over the same period.

But looking ahead, it's likely there could be further deterioration in the global economy heading into 2009. And that could squeeze the consumer even more, especially if the unemployment rate rises and home prices remain at depressed levels.

In that kind of environment, dental care, which generally receives less insurance coverage that general medical care, becomes a luxury expense. Add that to a tight credit environment, and dental offices could be spending less on major product upgrades as well as everyday maintenance materials.

There's also the fact that until recently, Dentsply also benefited from the weaker dollar; the company generates nearly 60% of its revenue overseas. Now that the dollar has corrected sharply against the world's major currencies in recent months, that benefit could quickly disappear from the company's bottom line.

As a result, I believe Dentsply will struggle to meet growth expectations over the coming quarters. So even though the stock has bounced back 15% over the past two days in response to solid quarterly results, I believe investors should avoid Dentsply shares at current levels.


Check out David Peltier's Value Investor for more stock picks that he believes can better weather today's economic down swing. Along with his recommendations, you will also have access to his model portfolio and his expertise on position management and exit strategies -- essentials in successful value investing. Click here for a special limited-time offer.

David Peltier is a research associate at TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback; click here to send him an email.

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