Subject: [NEXTEL-1] Lehman Brothers (Bath, Blake )On NXTL

From: Marcel <[email-masked]>
Date: Thu, 24 Apr 2003 16:31:59 -0400

24-Apr-03 Lehman Brothers (Bath, Blake ) NXTL AT AWE
Nextel Communications: Continued Strong Execution, Reit. 1-OW
EPS        (FY Dec)

2002            2003                    2004              %
Change
Actual   Old     New   St. Est   Old     New   St. Est
2003    2004
1Q   (0.35)  0.10E   0.21A   0.16E     NA      NA    0.26E
160      NA
2Q   (0.05)  0.20E   0.24E   0.21E     NA      NA    0.30E
580      NA
3Q    0.14   0.22E   0.24E   0.23E     NA      NA    0.31E
71      NA
4Q    0.21   0.24E   0.24E   0.22E     NA      NA    0.31E
14      NA

Year  (0.05)  0.76E   0.93E   0.82E   1.14E   1.29E   1.13E
1,960     39

P/E                   14.7                    10.6
Market Data

Financial Summary

Market Cap                        14633.7M   Revenue
FY03                                   $9.4B
Shares Outstanding              1070.5   Five-Year EPS
CAGR                                 18%
Float                                     818   Return on
Equity                                  7%
Dividend Yield                      NA   Current
BVPS                                       1.4
Convertible                            Yes   Debt To
Capital                                  41%
52 wk Range                       14.67 - 2.50

Stock Rating:                      Target:
New: 1-Overweight              New: 17.00
Old: 1-Overweight               Old: 17.00
Sector View:2-Neutral

INVESTMENT CONCLUSION :
*  Nextel reported a very strong 1Q03 and reiterated its 2003 guidance. The co. continues
to execute superbly. It remains our sole 1-Overweight rating among wireless pureplays.

SUMMARY :

*  Nextel added 480K net adds vs. our 450K est. due to impressive churn of 1.9%. Revs of
$2.2B were in line and           EBITDA of $906M was higher than our $869M est. due
primarily to lower bad debt exp.

*  We have left our key estimates essentially unchanged due to our prior expectations of a
strong 1Q03. We est. 1.7M net adds, ARPU of $68, revs of $9.4B, and EBITDA of $3.8B.

*  During 1Q03, Nextel retired $568M in debt and preferreds, further delevering the
balance sheet.

*  Nextel trades attractively at 6.3x `03 EBITDA vs. AWE and PCS at
    5.7x and 6.7x, respectively, despite vastly superior revenue and EBITDA growth and
FCF.

NEXTEL REPORTS A STRONG 1Q03, REITERATE 1-OVERWEIGHT

Nextel reported a strong 1Q03, with results slightly better than our estimates.  The
company continues to lead the industry in terms of churn (1.9%, the lowest level in 4
years) and EBITDA margins (41%, 2% higher than our est.)  The company is on track to meet
its 2003 financial and operating goals (1.7M net adds, $3.8B EBITDA, $500M FCF) and this
quarter`s results affirm our conviction in our estimates.  In addition, Nextel continued
to delever its balance sheet by retiring debt and preferreds, albeit at a slight loss due
to the fact that the company`s debt securities are now trading at or above par.

The company continues to trade attractively at 6.3x 2003 EBITDA versus AWE at 5.7x and PCS
at 6.7x.  In contrast to the lower multiple than PCS, Nextel is increasing revenue
significantly faster than both AT&T Wireless and Sprint PCS , 23% vs. 12% and 3% in 1Q03,
and 15% vs. 6% and 2% in 2003E.  In terms of EPS, NXTL trades at 14.7x our 2003 EPS
estimate of $0.93 and 10.6x our 2004 EPS estimate of $1.29.

CONTINUED OPERATING EXECUTION IN 1Q03

Nextel reported a strong 1Q03 across the board.  Nextel also continues to consistently
increase its subscriber base with 480,000 net additions in the quarter versus our 450,000
estimate.  Impressively low churn of 1.9% versus our 2.1% estimate enabled Nextel to add
greater-than-expected net adds despite adding slightly less gross additions than
expected.  The company is diversifying its distribution and added roughly 100,000
subscribers in the enterprise and government segment, 100,000 subscribers in the general
business segment, and 300,000 subscribers in the high value individual segment.

In terms of revenue, Nextel reported service revenue of $2.2 billion, up 23%
year-over-year and in line with expectations.  Average revenue per user of $68 was in line
with expectations, although the company has begun reporting ARPU slightly differently.  In
addition to service ARPU of $68, it reported subscriber ARPU (service ARPU less certain
fees) of $67.  While investors may be concerned by the slight drop in ARPU from $68 in
1Q02, we think the decline is relatively small given the commanding premium that Nextel
holds over the rest of the industry in terms of ARPU.  In addition, the company is adding
government subscribers that generate lower ARPU and are dilutive to the average, but that
also have significantly lower churn, making them very profitable subscribers.

NEXTEL COMMUNICATIONS: 1Q03 VARIANCE ANALYSIS

On the expense side of the income statement, the company continued to show leadership in
terms of expense control, with cash cost per user (CCPU) of $23 versus our estimate of
$25, driven in large part by lower bad debt expense.

Nextel recorded a calculated cost per gross addition (CPGA) of $510 which was above our
$475 estimate and is much higher than industry norms of $350 - $400.  Management commented
that it has been investing more in its retention efforts and upfront branding and
marketing for the coming year.  While there is certainly room for improvement in CPGA, it
is hard to be concerned by the level of spending given the relatively small number of
gross additions at Nextel when compared to its competition and the higher quality of the
subscribers being acquired and retained.  EBITDA of $906 million equates to a 41% margin,
and is substantially above our $869 million estimate.

The company reported $0.21 in EPS, also substantially above our $0.10 estimate.
Nextel continues to invest frugally, with only $305 million of capital spending in 1Q03.
Management stated that the iDEN network is scaling nicely and that the levels of dropped
and blocked calls continue to be less than 2%.
Due primarily to the lower capital spending and increase in EBITDA, Nextel reported $201
million in free cash flow versus our estimate of only $2 million.

NEXTEL COMMUNICATIONS: ESTIMATED VERSUS ACTUAL 1Q03 RESULTS

2003 OUTLOOK: GUIDANCE REITERATED, ESTIMATES MAINTAINED

Given our expectation that Nextel would perform strongly in 1Q03, we have maintained most
of our full year estimates.  We think the company will continue to execute well for the
remainder of the year.  We have allowed the slight beat in terms of subscriber growth to
flow through to our full year number and now expect 1.73 million net additions for 2003,
which we think is a conservative estimate given the company`s track record.  While we are
impressed with Nextel`s ability to reduce churn, we have conservatively estimated that
churn will be 2.0% for 2003, below our old estimate of 2.1% but above 1Q03 levels of
1.9%.  While we expect Nextel to be impacted by the implementation of wireless number
portability in 4Q03 and expect churn to rise slightly, we think that it will be a net
winner given the differentiation of its product offering, strong network quality, and
focus on subscriber retention.

Given the company`s comments regarding expected ARPU trends for the remainder of the year,
we are retaining our $68 ARPU estimate for 2003.  In line with past years, we expect ARPU
to pick up slightly in 2Q03 and 3Q03 before declining in 4Q03.  Our 2003 revenue estimate
also remains unchanged at $9.4 billion.

As mentioned above, Nextel continues to impress with its ability to reduce CCPU.  For the
full year, we expect CCPU of $23, below our prior estimate of $25 and in line with 1Q03
performance.  In terms of marketing expense, we have increased our 2003 CPGA estimate to
$515 from $464, to take into account the higher levels in 1Q03 and the company`s desire to
invest in upfront branding and marketing spending to propel sustained growth.  In line
with company guidance. we are maintaining our $3.8 billion EBITDA estimate, as the
improvement in CCPU offsets the increase in CPGA.  Finally, we have increased our full
year earnings per share estimate to $0.93 from $0.76, in large part due to
better-than-expected 1Q03 results.

Despite the lower investment in 1Q03, Nextel still intends to invest its full 2003 capital
budget of $1.8 billion and we have retained our estimate as the company expects investment
to be more back end loaded.  The company reiterated that its 6:1 vocoder upgrade, which is
expected to increase capacity by double, is on track for deployment during 2H03.

NEXTEL COMMUNICATIONS: PREVIOUS VERSUS CURRENT 2Q03 ESTIMATES

DELEVERAGING CONTINUES, LIQUIDITY POSITION STRONG

During 1Q03, Nextel continued to delever by retiring debt and
preferred stock.  Given that the company`s debt securities are now trading at
or above par, Nextel recorded a minor $7 million loss as it retired $568
million in principal amount.  While the company used $570 million of cash to
retire the debt (instead of a combination of cash and equity, as had been done
previously), Nextel maintains its strong liquidity position, with
$2.3 billion in cash plus $1.3 billion in available liquidity under its
senior credit facility.

VALUATION METHODOLOGY OF NEXTEL

Our discounted cash flow model values the company at $17 per share
by the end of 2003.  We arrive at this price target using a weighted average cost of
capital of 12% and a perpetual growth rate of 5%.

Our DCF model yields an end of 2003 private market enterprise value for Nextel of $29.0
billion.  Subtracting $10.0 billion of year-end 2003 net debt gives an estimated private
market equity value of $19.0 billion.
Applying a 10% private-to-public market discount gives an end of 2003 public
market value of $17.1 billion.

To this we add $576 million for Nextel`s 32% investment in Nextel
Partners and $177 million for its investment in Nextel International.  With
1,059 million fully diluted shares outstanding, our price target is $17.

Nextel trades at 6.3x 2003 EBITDA, versus AT&T Wireless at 5.7x and
Sprint PCS at 6.7x.  One of the few wireless company`s to have positive
earnings per share, Nextel trades at 14.7x our 2003 estimate of $0.93 and 10.6x
our 2004 estimate of $1.29.

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