Subject: [NEXTEL-1] Morgan Stanley on Mextel

From: Marcel <[email-masked]>
Date: Wed, 23 Apr 2003 21:31:44 -0400

23-Apr-03 Morgan Stanley (Carvalho, Luiz + NXTL

April 23, 2003
Change in Earnings Forecast
Nextel (NASDAQ: NXTL, Bloomberg: NXTL US)

__________________________________
__________________________________
-HIGHER MARGINS LEAD TO STRONG RESULTS
 Nextel delivered solid results across the board. EPS was $0.20 vs.
our forecast of $0.16.  EBITDA reached $906M versus our projection of
$901M, based on industry leading 41% margin.  Churn was another positive
highlight at 1.9%. We are now increasing our estimates for Nextel.

-GOOD GROWTH AND DELEVERAGING
 Net adds of 480K were 30K ahead of our numbers.  ARPU of $67 was
slightly below our $68 due to seasonality. We maintain our ARPU forecast of
$67.60 for the year.  The company retired another $568 million in face value
of debt, bringing the total over the last year to $3.8 billion.  Net debt is
now at $10.7B vs. $10.9B in 4Q02.

-POSITIVE MOMENTUM AND SPECTRUM SWAP
 NXTL's strong results should translate into positive momentum for
the stock. We believe that a positive decision on the spectrum swap proposal
(June) could be a positive for the stock. However, the shelf registration,
network upgrade decisions and competitive push to talk announcements could hurt the
stock in 2H03.

-INDUSTRY VIEW: ATTRACTIVE
 With free cash flow and profitability improving, we expect the
wireless  providers' overall risk profile to be reduced, leading to higher
valuations. As a result, we expect the industry to outperform the S&P 500
despite the intense competition.
__________________________________
STOCK RATING                   EQUAL-WEIGHT V
Price (April 23, 2003)                 $12.35
Price Target                              $17
52-Week Range                   $14.67 - 2.50

Stock ratings are relative to the analyst's industry (or industry team's) coverage
universe.

GICS SECTOR                  TELECOM SERVICES
US Strategist Weight                     2.8%
S&P 500 Weight                           3.3%

                               WHAT'S CHANGED
Earnings (2003)           to $0.92 from $0.78
Earnings (2004)           to $1.16 from $0.98
__________________________________
Fiscal Year Ends (Dec 31)     2002      2003e      2004e       2005e
EPS ($)                       0.25       0.92       1.16        1.31
First Call Consensus ($)    (0.05)       0.82       1.13        1.37
Prior EPS Ests. ($)                      0.78       0.98        1.13

P/E                           49.4       13.5       10.7         9.4
P/CE                          19.3        4.5        4.0         3.8
Price/Book                     2.7        2.4        2.0         1.7
EV/EBITDA                      8.5        6.4        5.2         4.6

Market Cap ($mn)          13,125.7
Enterprise Value ($mn)    24,387.5
Debt/Cap (03/03) (%)          75.1
Return on Equity (03/03) (%)   7.9
LT Est EPS Growth ('yy - 'yy) (%)NA
P/E to Growth
Shares Outstanding (mn)    1,062.8

Q'trly                        2002      2003e                  2004e
EPS                         actual       curr      prior
curr     prior
Q1                          (0.35)       0.21       0.00
NA
Q2                            0.07      0.24e      0.21e
NA
Q3                            0.13      0.27e      0.21e
NA
Q4                            0.20      0.19e      0.18e
NA
e = Morgan Stanley Research estimates

Morgan Stanley does and seeks to do
business with companies covered in its
research reports. Investors should
consider this report as only a single factor
in making their investment decision.

Company Description

Nextel Corp. is a domestic and international wireless service
provider.  The company is the only major wireless service operator to offer
dispatch (direct-connect) and cellular service in the same phone.

When You Do the Right Things . . .

Nextel delivered solid results right when the markets feared the
worst after Sprint PCS had reported weak top line.  With Nextel, Verizon
Wireless and Cingular reporting solid numbers, the worst fears seem to have mostly
dissipated.  At least, there is no question that Nextel is doing the
right things and continues to enjoy very strong operating momentum.

The company reported revenue growth of 20.7% over the last 12
months. EBITDA was up 54.9% and net income moved from a $654 million loss in 1Q02
to a profit of $240 million in 1Q03.  Subscriber growth in the period was 21.0%.
The results are summarized in the table below.

Exhibit 1

NXTL 1Q03 at a Glance

The PDF versions of the complete document including these graphics
or tables are available to Morgan Stanley clients through Research Link at
www.morganstanley.com.  Contact your sales representative for access
information.

Source: Morgan Stanley Research, Company Data.

Subscriber Growth Across the Board

Nextel has successfully continue its consistent subscriber growth
strategy while increasing profitability and diversifying its base.  The
majority of new subscriber during the quarter came from the high-value individual
segment.  We believe that this segment provides both opportunities and some
concerns for Nextel.  In our view, the opportunities are:

- Large market segment.  Nextel has not traditionally focused on
this area so there is ample opportunity to grow, especially considering Nextel
differentiated product.

- Profitable growth.  Nextel has been able to grow this segment while
increasing profitability.  Expansion of its direct distribution
channels and lowering overall acquisition cost should help it continue its smart
growth strategy.

Exhibit 2

Growth from High Value Individuals

However, we do have some concerns regarding this segment especially
as we look into 2004.  Our issues are as follows:

- Price sensitivity.  Individuals are more sensitive and apt to
churn due to price.  We believe that quality of service (both network and
customer care) is the main driver of churn, but this is more the case for business
users rather than individuals.  The potential for higher churn does exist as this
base grows as a percentage of the total.

- Competitive offerings.  Nextel currently enjoys the advantages of
push-to- talk differentiation.  We believe that upcoming competitive products
will be inferior to Nextel s, at least in 2003 and 2004.  This situation
should protect Nextel s SME, enterprise and government segments more so than the
individual customers.  In our view, individuals could less sensitive to the
latency than other users.  If this is the case, then growth and churn in this
segment could be challenged.

We Don t See Any Major Drop in ARPU

Despite recent fears, we are not changing our 2003 ARPU estimate for
Nextel of $57.60.  We believe the decline in ARPU we saw in the 1Q03 (one
dollar lower than 1Q02) can be explained mostly by seasonal factors.  Considering
the positive seasonality in 2Q and 3Q and the positive affect of
wireless data, we don t see a major risk in our projections.

Exhibit 3

Churn Reduction is Impressive

Adjusting Our Estimates

We are taking this opportunity to adjust our estimates after the
strong 1Q03 results.  We are increasing our EPS figures to account for the lower
than expect interest expense as the company continues to delever its
balance sheet.

We have also increase our net add estimates slightly to account for
the better than expected growth during the quarter.  Our model changes are
detailed below and full models attached.

Exhibit 4

New Financial Estimates at a Glance, EPS higher

The PDF versions of the complete document including these graphics
or tables are available to Morgan Stanley clients through Research Link at
www.morganstanley.com.  Contact your sales representative for access
information.

Source: Company data, Morgan Stanley Research

Exhibit 5

Key Metrics at a Glance, More Net Adds

Source: Company data, Morgan Stanley Research

Margins Reach 41%, Best Among Nationals

Since 2Q02, Nextel has posted impressive EBITDA margins despite the
extremely competitive environment and double-digit declines in prices per
minute.  In our view, this has been accomplished through some innovative outsourcing
deals was well as focus on the two large cost components of churn and bad
debt.   We were please to see that bad debt levels for the company reach 2.4% in the
quarter and are likely to remain below 2.5% for the remainder of the year.
We are also well impressed with the progress in operational cost.  The company
has lowered cash cost per user (CCPU) to $23 this quarter versus $24 in 4Q02 and
$27 in 1Q03.  We expect CCPU to remain in the $23 range for the remainder
of the year.

Exhibit 6

EBITDA Margins Up, Churn Down

Churn Positively Surprises

There is no denying that 1.9% churn is impressive.  We credit this
improvement in churn to the following:

- Quality of service.  In our view, Nextel does not get enough
credit for the service it provides to customers.  We believe that Nextel offers
SMEs, governments and enterprise users solutions which other carriers are
just beginning to explore.  In our view, Nextel s increased share of
small and large enterprises is indicative of the company efforts here.  According to
our soon to be published survey of CIOs, Nextel has gained market share.

- Network quality.  Nextel has done a good job at offering a
competitive service despite the fact that it is the lone iDen technology user.
The company has demonstrated that technology alone does not dictate network
quality.  We believe that its push-to-talk product helps to alleviate network
congestion as it still accounts for some 30% of minutes while consuming far less
network resources.

- Attractive subscriber base.  We believe that Nextel benefits from
its exposure to government agencies as well as its differentiated
product.  We believe that large agencies are very unlikely to churn once a
contract has been awarded to a service provider.  Of course, we credit Nextel for
winning these subscribers in the first place.

With wireless number portability (WNP) on the horizon, we believe
that Nextel is in a good position to emerge a relative winner.  In our view,
network and service quality should be the main dictators of which company gains
share and which looses as a result of WNP.  However, Nextel s increased
exposure to the individual user does increase the risk that churn might rise from
the very low levels due to some churning of this base.  We do not expect this to
be significant or long lasting.

Capex:  Upgrade is Getting Closer?

Once we have a decision regarding spectrum swap (expected for mid-year) we
anticipate that Nextel will announce its long-term network upgrade
plans.  It is clear that the implementation of the new 4kbps vocoder will help
the company to increase voice capacity in the medium term.  However, in the long-
term, Nextel needs to be able to offer high speed wireless data services
to its high-value subscriber base.

In our opinion, the company will need to implement a network overlay
(our  guess  today is that the company will implement cdma2000
technology).  We are including the cost (around $2.5B) of this overlay in our capex
numbers, over a three-year period starting in 2004.  We believe that the company
will soon begin to talk about the cost and timing of this overlay.

Maintaining Equal-weight-V and Price Target of $17

We continue to rate NXTL Equal-weight-V as we think that the stock
should perform in-line with the wireless industry.  We are also keeping our
year-end target price for NXTL shares at $17.  This figure is based on our
discounted cash flow (DCF) analysis and on multiples.  Our DCF assumes an 11%
weighted- average cost of capital (WACC) and long-term free cash flow growth
of 6%.  Our target price assumes that the stock will trade at around 25%
discount to DCF. We also examined the company s relative trading multiples. At $17,
NXTL shares would be trading at an attractive 14.7x 2004 earnings, according to
our estimates.

Exhibit 7

NXTL Valuation Table

In our view, Nextel s relative outperformance of the group is
unlikely to continue in 2003.  The company has done a great job on the
operational side by increasing EBITDA margins from 32% in 1Q02 to 41% 1Q03.  Similarly,
capex has already been reduced significantly as the company has postponed its
3G upgrade.

Other companies have more operating leverage, in our view.

Medium and Long Term Issues Still Persist

Despite the strong operating performance, we still believe that the
company has to address the following issues:

- Nextel needs to strengthen its spectrum position.  The proposed
spectrum-swap would help the company considerably if approved by the FCC, but a
positive decision on the issue is not certain and is not expected for at
least 3 more months;

- Sooner or later, Nextel will have to deploy a network solution
that allows the company to provide higher-speed data services to its customers.
As wireless data becomes more important, pressure on Nextel might
increase;

- Competition will intensify as other players begin to offer  push-
to-talk services.  However, we don t expect any meaningful competition until
2004, maybe 2005.

What Are the Key Focus Areas?

In our view, for the stock to reach our target price, it is
important that the management team of Nextel continue to focus on the following key
areas:

- Making the numbers is, by far, the most important key to success.
If the company delivers good results once again in 2003, more skeptics
(there are several out there . . .) should be converted;

- Maintain the quality of the subscriber base, especially churn and
bad debt at low levels;

- Continue with opportunistic debt reduction programs;

- Increase clarity on the potential network overlays/upgrades for
higher-speed data services;

- Continue to work hard to obtain additional spectrum, even if the
outcome of the current spectrum-swap proposal is not entirely favorable for the
company.

We believe that an obvious catalyst for the stock would be a
positive outcome of the spectrum proposal presented to the FCC.

Key Investment Positives

- Differentiated Product.  Nextel uses iDEN technology, which allows
implementation of dispatch services and flexible channel usage.
Dispatch services allow users to communicate with each other and groups of
other users by simply pressing a button--similar to a walkie-talkie.  Since
April 2000, Nextel has provided data services using its own packet-based capable
network.

- Highest-spending customer base.  The differentiated service that
Nextel offers appeals mostly to business users who tend to be very big
spenders.
Nextel s average revenue per user (ARPU) is among the highest in the
industry, at about $67 per month.  We believe that the distinctiveness of
Nextel s product and services helps the company have a lower-than-average
churn rate of 1.9% per month.

- Deleveraging has helped.  Nextel has been successful in reducing
its total debt load by $3.8 billion during the last 12 months through a series
of debt for equity swaps.  The company has been able to do these
transactions while preserving its cash balance and its existing credit lines.  We
believe that Nextel s deleveraging has helped strengthen its balance sheet
considerably as well as reduce its overall financial risk.

Key Investment Risks

- Cost of technology conversion.  Nextel is the only operator using
iDEN, which has no clearly defined path to 3G.  Conversion to CDMA2000 could be
complex and costly.  We believe that Nextel will eventually upgrade its network
to CDMA2000, but not until 2005-2006.

- Competitive niche market.  The characteristics of Nextel s
customer base makeit very appealing for other players to try to gain share in this
profitable segment, in our view.  Though other players should ultimately have
push-to-talk services to offer in the future, we believe that Nextel has a
product and service advantage that is hard to match today.

Industry View: Attractive

Our increased conviction in the prospects for free cash flow (FCF)
improvement, driven mostly by lower capex, is the primary reason for our
Attractive view on the industry.  We expect most national wireless carriers to turn FCF
positive by mid-2003.  We believe that as companies turn FCF positive, they
should be able to lower financial risk, reduce their cost of capital, and
improve stock valuation levels.

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