PAUL JOHNSON
FOUNDER AND PORTFOLIO MANAGER
NICUSA CAPITAL

COMPANY: Sirona Dental Systems
TICKER: SIRO (Nasdaq)
PRICE: $42.50
52 WEEK RANGE: $19.33-$27.20
MARKET CAPITALIZATION: N/A

Paul Johnson is the founder and portfolio manager of Nicusa Capital, a private investment partnership based in New York. Mr. Johnson spoke with Katharine Herrup of The New York Sun about why Schick’s merger with Sirona makes a new winning team.

What does Sirona do?

Sirona, a private company based in Europe, is the leader in digital radiography in Europe. Sirona has another product area that is growing very fast, CAD/CAM, which dentists use to do bridges and crowns. Sirona is the world leader and only leader of CAD/CAM and there is less than 10% market penetration in that area. Sirona has had this technology for 20 years.Those two products together are growing in excess of 25% a year. Sirona Dental Systems merged yesterday with Schick, a much smaller company based in America, so the stock changed to SIRO from SCHK.

What does/did Schick do?

They do digital radiography. When you go the dentist and get your teeth xrayed, they make the sensor that goes in your mouth, and the software that goes on the computer.They make like a digital camera for your teeth. Schick is the leader in America for digital radiography. Kodak has been a competitor, but it is not executed particularly well.

So why do you think this merger will be successful?

Because Sirona was a private company people have not taken the time to look at their numbers. Sirona’s numbers have not been very transparent, but we have taken them apart and are very excited about the merger of the two companies.

Why do you like the stock?

Sirona has been a private company that people haven’t seen numbers for yet, the merged companies will have two products that people haven’t seen numbers for, and the combined company can grow over 15% for a number of years. Schick itself has been a good stock over the last couple of years. Less than 20% of their market is penetrated, so the company and their products are just starting to show up on people’s radar screens.

Has Nicusa Capital held Schick or Sirona stock previously?

We’ve been an investor in Schick for three years this month, and its still one of our largest positions. And we still think it’s undervalued.

What do you think the stock is worth? Do you expect its value to increase?

We think by the end of the year the stock could be $54 or more. We think today it’s worth in the mid-$50s. In 2007 the company will have $2 share of cash flow, that’s 30 times the cash flow on an enterprise value which suggests the stock will be worth $55 by the end of the year.

What’s driving growth forward?

There’s lots of buzz that they have some pretty significant new dental technology products by the end of the calendar year, but that is not factored into our model. Dentistry has become a cool area again; everyone wants plastic surgery in their mouths.

Is it a good time to buy?

Absolutely, and we think the June quarter will surprise people and the clarity that they will see in the numbers over the next 6 months will surprise people.

What are the risks?

Certainly there is a risk of a slowdown in dental demand. There could be a risk in the overall meltdown of the stock market, or some confusion of the initial numbers of the merger. Initially the stock will look expensive on gap numbers, but not on cash flow.