Subject: [NEXTEL-1] Smith Barney on NEXTEL Communications Q3-03 - NXTL-SBD56627.pdf

From: [email-masked]
Date: Fri, 17 Oct 2003 12:41:00 -0400

Smith Barney on NEXTEL Communications Q3-03 - NXTL-SBD56627.pdf

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From: [email-masked]
Date: Fri, 17 Oct 2003 12:56:31 -0400

> Smith Barney on NEXTEL Communications Q3-03 - NXTL-SBD56627.pdf

SB On NXTL RISKS

We rate Nextel Communications “Speculative Risk” due to the company’s high financial
leverage with net debt-to-EBITDA of 2.6x as well as substantial stock price volatility.
We have also considered Nextel’s revenue outlook, earnings leverage, FCF production, and
other qualitative factors such as the threat of competing PTT solutions.  There are
numerous risks to our thesis that could negatively affect the share price and our target
valuation.

We find Nextel is still susceptible to the industry risks of slowing subscriber growth
and pricing competition. Financial leverage is also a risk for Nextel, but the company
has made substantial strides to improve its financial liquidity with better operating
results and reductions in capital spending. Over time, we expect Nextel’s ARPU to
decline as it currently represents a substantial premium to the industry average. We
believe the risk to ARPU is greatest once minutes of use plateau.

Nextel also uses a proprietary technology on SMR spectrum, which may increase the
expense of a possible “3G” migration. In addition, Nextel faces increased competition to
its Direct Connect product from competing carriers who have announced plans to offer a
“push-to-talk” product. Also, Nextel’s shares could be adversely affected if the company
is not successful in achieving its proposed Public Safety Spectrum Swap with the FCC.
We do find increasing prospects for Nextel to change its accounting practice for tax
expense during 2004 that would put downward pressure on earnings as the company is
recognizing only a 6% tax expense rate during the third quarter. We would note that the
recognition of Nextels valuation allowance may or may not occur but we are merely
highlighting the potential risk.

If the impact on the company from any of these factors proves to be less than we
anticipate, the stock could materially outperform our target. Conversely, if the impact
on the company from any of these factors proves to be greater than we anticipate, the
stock will likely have difficulty achieving our target price.