Subject: [NEXTEL-1] 16-Oct-03 Prudential Equity Group On Nextel

From: [email-masked]
Date: Sun, 19 Oct 2003 11:23:40 -0400

16-Oct-03 Prudential Equity Group (C.LARSEN ) NXTL
NXTL: POST-CALL UPDATE - RAISING ESTIMATES AND PRICE TARGET AFTER
STANDOUT
QUARTER

Nextel Communications  (NXTL - $22.12) -- OTC

-

----- EARNINGS ------------------------------------------------------
FY        EPS     P/E      1Q         2Q
3Q         4Q
Actual  12/02     $0.27A   81.9X   ($0.81)A    $0.37A     $0.14A
$0.21A
Current 12/03     $1.18E   18.7X    $0.21A     $0.27A     $0.33A
$0.37E
Prior             $1.11E   19.9X
$0.30E
Current 12/04     $1.55E   14.3X
Prior             $1.37E   16.1X

----- FUNDAMENTAL ---------------------------------------------------
Avg. Volume: 18,600,000     Div/Yield: NA               EPS Growth:
0.00%
Market Cap: $20,019 m       52w Range: 22.20-8.70       P/E /
Growth: NM
Shares: 905.00 m

----- HIGHLIGHTS ----------------------------------------------------
*     Nextel reported 3Q03 results before the market open this morning.  Net adds
came in at 646k vs our upwardly revised estimate of 500k, churn came in at 1.4% vs
estimate of 1.7%, EBITDA came in at $1,129M vs estimate of
$1,023M, and EPS of $0.33 was higher than our estimate of $0.30 (Street consensus
was $0.32).

*     We provide a summary of 3Q03 results vs our estimates below.

*     We believe these results indicate both operational excellence at Nextel,
which we continue to rate Overweight, and strong fundamental trends for the
Wireless Telecom Industry, which we continue to rate Favorable.

----- DISCUSSION ----------------------------------------------------
Nextel Reported 3Q03 Results Before The Market This Morning.  Management hosted a
conference call to discuss results:
replay (US) 800-475-6701, (Int'l)
320-365-3844, passcode: 700244.
3Q03 Nextel Results At A Glance

(millions, except ARPU, CPGA) 3Q02Act.   2Q03Act.    3Q03Est.
3Q03Act.
Service Revenue              $2,139    $2,385      $2,455     $2,599
EBITDA                      $878      $1,004      $1,023     $1,129
Subscribers                  10.116    11.683      12.183     12.329
Net Additions                0.480     0.591      0.500      0.646
ARPU (calculated)            $72       $70        $69        $72*
Churn                       2.0%      1.6%       1.7%       1.4%
CPGA                        $460      $460       $452       $450
*Reported: $71
Source: Company data, Prudential Equity Group, Inc.

Nextel reports a strong quarter across the board, beating our estimates for net
adds, churn, ARPU, EBITDA, and EPS.  Net adds of 646k (vs. our upwardly-revised
estimate of 500k) was driven primarily by extremely low churn of 1.4% (vs our
estimate of 1.7%; the reported number was the lowest in 6 years) and slightly
higher than expected gross adds.  Gross adds were up about 1% sequentially.

Management indicated that additional subscribers from existing customers accounted
for 41% of net adds.
Note that Boost Mobile net adds of 102k are not included in the net ad figure
(although revenues and expenses are consolidated).  Given the apparent success to
date, we expect Nextel to offer Boost in more markets as we head into 2004.
Bad debt expense as a percentage of service revenue was 0.7% vs 1.0% in 2Q03; bad
debt expense fell in absolute terms despite an increase in service revs to $20M
from $25M.  While these numbers are exceptional, we caution that there is not much
farther for them to fall, and some of the sequential decline may be attributable
to the unwinding of previous conservatism.
ARPU. Strong ARPU of $71 (reported.  Our calculated arithimetic average works out
to $72) vs. our estimate of $69 benefited from, among other things, widespread
adoption of the nationwide Direct Connect service: management indicated that 1/3
of D.C. customers had used the service in the last 60 days.

We estimate that this may have generated about a dollar of incremental ARPU firm
wide.

We estimate that the average Nationwide Direct Connect customer generates an
additional $6 in ARPU - perhaps 50% of them subscribing to the $10/mo plan ($5)
and the remaining 50% using perhaps 20 minutes a month at $0.10/ea ($1).
Without any further increase in penetration, this $6 translates into close to $2
in incremental ARPU for a full quarter: $6 x 1/3 of the subscribers.  Finally,
usage continued to increase, as it rose to 740 MOUs/month from 720 in the 2nd
quarter and roughly 650/month in the four quarters prior to that; overall minutes
of use were up 39% year over year.

CPGA/CCPU.  CPGA of $450 (vs our estimate of $452) was down slightly from $460 in
2Q03.  Cash cost per user or CCPU was slightly less than $24, up slightly from
2Q03 on higher G&A expenses.

EBITDA. As a result of all these positive surprises, EBITDA beat our estimates as
well, with results of $1,129M versus our $1,023M, as EBITDA margins of 43.4%
bested our 41.7% estimate.  Cost of Service, and Sales & Marketing margins
improved slightly, while G&A margins rose slightly.  As mentioned, CPGA was
slightly better than in 2Q03.  EBITDA margin on incremental revenue was 58%.

That is, from an additional $214M in service revenue sequentially, Nextel
generated $125M in EBITDA - demonstrating the scale and margin expansion
opportunities that the company can still benefit from.  EPS. Earnings per basic
share of $0.33 topped our estimate of $0.30, despite taking a $132M one-time
charge for debt retirement, which translates to $0.12-$0.13 (before any tax
impact).  Adding this back gives a "pro-forma" operating earnings number around
$0.45, significantly ahead of both our expectations and Street consensus.  As
detailed below, we are raising our estimates for 4Q03 and for fully-year 2004.
Aggressive debt reduction continues to strengthen the balance sheet, although
equity is diluted slightly.  Nextel retired approximately $2.2B in debt and
preferred in the third quarter.  In addition to $1.76B in cash, the company issued
30M shares of common stock valued at $584M; Nextel raised an additional $500M
through its Direct Stock Purchase plan.  Over the past year, fully-diluted shares
outstanding have risen from 988M to 1,091M.

Management raises guidance for 2003.  Nextel raised guidance for 2003 - Free cash
flow to $1B or more from $600M or more;

- Net adds to approximately 2.2M from 1.9M or more

- EBITDA to $4.1B or more from $3.9B

- EPS to $1.15 or more from $1.00

- Capex guidance remains $1.8B or less; given capex YTD, this implies a 4Q spend
materially higher than the previous three quarters.

Raising our estimates for 4Q03 and 2004, and our price target along with it.
Based on strong operational trends at Nextel, we are raising our 4Q03 net add
estimate to 500k from 450k, our EBITDA estimate to $1.14B from $1.03B, and our EPS
estimate to $0.37 from $0.30. Estimated 2004 numbers are: 1.65M net adds (from
1.55M), EBITDA of $4.4B (from $4.3B), and EPS of $1.55 (from $1.37).  As a result
of these changes, our new price target is $26 per share (from $23).

Conclusion.  Nextel continues to produce industry-leading ARPU, Churn, and EBITDA
margin metrics while adding subscribers at a healthy pace.  While risks remain,
including the company-specific threats of competitive push to talk and the
spectrum swap proposal, and the more general risk of wireless number portability,
we continue to find Nextel shares attractive at these levels.

Additionally, we believe Nextel's extremely strong 3Q03 numbers presage a very
upbeat quarter for the wireless industry in general.

We Maintain Our Overweight Rating On Nextel Communications.  We believe
encouraging industry trends and Nextel's operational leverage and strong
competitive position make it attractive at current price levels.

Price Target Of $26.  The valuation method we use to determine our year-end 2004
price target is based on a price to free cash flow multiple and a discounted cash
flow analysis.  We are using a multiple of roughly 18x our estimated 2005
tax-effected equity cash flow per share of $1.40.  Our discounted cash flow (DCF)
analysis assumes that Nextel Communications will reach a terminal growth stage
after 2007, with a terminal growth rate of 3.5% and a cost of capital of roughly
9%.
The Risks That May Impede Achievement Of The Price Target Include The Following:
As with other wireless carriers, Nextel Communications has significant risks.

For Nextel, competitive push-to-talk offerings from other carriers as well as
approval of the proposed spectrum swap with various government agencies are the
main company specific risks.  Overall for the industry, the build-out of wireless
networks involves a significant amount of market-timing risk, regulatory risk,
financing risk, consolidation risk as well as competitive risks in a rapidly
changing and highly competitive industry.  Wireless number portability also
presents the risk of increased churn, increased pricing competition and/or
diminished margins.  There are litigation risks as the issue of health hazards
associated with alleged harmful cellphone radiation has been reported in the
media, although there have been no legal precedents supporting this claim.

----- BUSINESS ------------------------------------------------------

Nextel Communications (NXTL), based in Reston, Virginia, holds Specialized Mobile
Radio (SMR) radio licenses nationwide.  Nextel is deploying a digital wireless
technology known as iDEN (integrated dispatch enhanced network), developed by
Motorola for Nextel.  Already commercial in all 100 of the largest markets in the
U.S., Nextel offers an integrated solution of dispatch, digital cellular, short
messaging, and data in one handset.

------------------------ Yahoo! Groups Sponsor ---------------------~-->
Buy Ink Cartridges or Refill Kits for your HP, Epson, Canon or Lexmark
Printer at MyInks.com. Free s/h on orders $50 or more to the US & Canada.
http://www.c1tracking.com/l.asp?cid=5511
http://us.click.yahoo.com/mOAaAA/3exGAA/qnsNAA/61FxlB/TM
---------------------------------------------------------------------~->

Your use of Yahoo! Groups is subject to http://docs.yahoo.com/info/terms/